Annual Report 2019

leaderSTEADY 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

STEADY leader REPORT FOR INVESTORS

38 UPSTREAM 56 MIDSTREAM 65 DOWNSTREAM

26% of oil and condensate production and 15% of gas production 57% of total oil transportation 79% of total gas transportation in the country KMG has interests in all major modern refineries in , in Kazakhstan with a combined market share of 81%

CONTENTS

STRATEGIC REPORT CORPORATE FINANCIAL APPENDIX GOVERNANCE STATEMENTS

COMPANY OVERVIEW 4 OPERATING REVIEW 38 RESPONSIBILITY STATEMENT 102 MANAGEMENT BOARD PERFORMANCE AUDITOR'S REPORT 160 REPORT ON COMPLIANCE OF Scope of operation 4 Reserves 38 CORPORATE GOVERNANCE FRAMEWORK 103 REPORT 133 THE CORPORATE GOVERNANCE CODE 2019 260 Geography 4 Exploration 40 CORPORATE GOVERNANCE DEVELOPMENT Management Board’s activities in 2019 133 CONSOLIDATED FINANCIAL STATEMENTS 166 WHOLESALE SALES OF OIL PRODUCTS 267 Capital structure 4 Oil Production 45 REPORT 104 Membership of the Management Board 134 Consolidated statement Asset structure 6 Mega Projects 46 of comprehensive income 166 Key markets 7 Gas Production 54 REPORT BY THE BOARD OF DIRECTORS 108 REMUNERATION REPORT 139 Consolidated statement Business model 8 Oil Transportation 56 Membership of the Board of Directors 108 Remuneration of the Board of Directors 139 of financial position 168 Key strengths 10 Gas Transportation and Marketing 59 Board activities during 2019 118 Remuneration of members of the Consolidated statement of cash flows 170 Performance highlights 14 Downstream 65 Performance assessment of the Board of Management Board 141 Consolidated statement of changes Service projects 70 Directors 120 in equity 173 STATEMENT FROM THE CHAIRMAN CFO FINANCIAL REVIEW 72 Corporate Secretary 120 CORPORATE CONTROL 142 OF THE BOARD OF DIRECTORS 16 Internal Audit Service 142 NOTES TO THE CONSOLIDATED FINANCIAL CHIEF EXECUTIVE OFFICER’S STATEMENT 18 SUSTAINABILITY MANAGEMENT 81 BOARD COMMITTEE PERFORMANCE REPORT 121 Compliance Service 143 STATEMENTS 175 Management system 81 Finance Committee 122 Risk management and internal control 144 STRATEGY 20 Environmental responsibility and safety 85 Nomination and Remuneration Committee 123 Key risks 149 Strategy and Portfolio Management Macroeconomics and global trends 20 Energy saving and energy efficiency Committee 125 Internal drivers and their impact programmes 87 SHAREHOLDER AND INVESTOR RELATIONS 154 Audit Committee 127 on strategy implementation 25 Increasing APG utilisation rates 90 Share capital 154 Health, Safety, Environment and Sustainable Dividends 155 Strategic Priorities 29 Development Committee 131 Bondholder Relations 155 KPI system 32 OCCUPATIONAL HEALTH AND SAFETY 92 Bonds Issue 156 Summary of project implementation Injury 93 Investor communications 157 aligned with strategic priorities 33 Occupational health 94 Investment portfolio overview 33 Personnel development 95 Transformation and Digitalization 36 Social Stability Index (SSI) 99

1 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

NEXT: STRATEGIC REPORT #1 BY OIL PRODUCTION IN KAZAKHSTAN

The Company occupies more than a quarter of the Republic THE GIANT KASHAGAN of Kazakhstan's oil and gas FIELD IS THE LARGEST OIL condensate production. KASHAGAN DISCOVERY IN THE LAST FOUR DECADES. THE ESTIMATED 2P OIL AND CONDENSATE RESERVES LIFE IS OVER 120 YEARS AT THE 2019 PRODUCTION LEVEL.

The development of the Kashagan field in the harsh marine conditions of the North Caspian represents a unique combination of technical and logistical challenges.

2 3 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

1 MUNAITAS NORTH-WEST PIPELINE COMPANY LLP COMPANY OVERVIEW 1 MUNAITAS NORTH-WEST PIPELINE COMPANY LLP 2 KAZAKHSTAN-CHINA PIPELINE LLP 2 KAZAKHSTAN-CHINA PIPELINE LLP 3 CASPIAN PIPELINE CONSORTIUM 3 CASPIAN PIPELINE CONSORTIUM 4 JSC KAZTRANSOIL 4 JSC KAZTRANSOIL JSC National Company KazMunayGas (KMG, the Company) 1 JSC INTERGAS CENTRAL ASIA 1 JSC INTERGAS CENTRAL ASIA is Kazakhstan's leading vertically integrated oil 2 BEINEU-SHYMKENT GAS PIPELINE LLP 2 BEINEU-SHYMKENT GAS PIPELINE LLP and gas company, operating assets across the entire 3 ASIAN GAS PIPELINE LLP 3 ASIAN GAS PIPELINE LLP 4 SARYARKA GAS PIPELINE PROJECT production cycle from the exploration and production 1 MUNAITAS NORTH-WEST PIPELINE COMPANY LLP PAVLODAR 4 SARYARKA GAS PIPELINE PROJECT 2 of hydrocarbons to transportation, refining OIL CHEMISTRY KAZAKHSTAN-CHINA PIPELINEPAVLODAR LLP PLANT and services. Established in 2002, the Company 3 CASPIAN PIPELINE CONSORTIUMOIL CHEMISTRY PLANT represents the interests of the Republic 4 JSC KAZTRANSOIL NUR-SULTAN 4 of Kazakhstan in the national oil and gas 1 JSC INTERGAS CENTRAL ASIA NUR-SULTAN 4 industry. 2 BEINEU-SHYMKENT GAS PIPELINE LLP KPO KARACHAGANAK 3 ASIAN GAS PIPELINE LLP KPO KARACHAGANAK 4 SARYARKA GAS PIPELINE PROJECT

4 PAVLODAR 1 OIL CHEMISTRY 4 PLANT CAPITAL STRUCTURE 4 2 1 4 NUR-SULTAN 4 KMG is owned by Sovereign Wealth Fund Samruk- 4 2 EMBAMUNAYGAS 1 Kazyna Joint-Stock Company (hereinafter – Samruk- 4 KAZGERMUNAI Kazyna JSC, the Fund) (90.42%) and the National OIL REFINERY KAZAKHTURKMUNAY 1 NCOC KPO EMBAMUNAYGAS Bank of Kazakhstan (hereinafter – NBK) (9.58%). KASHAGAN KARACHAGANAKKAZAKHOIL AKTOBE ATYRAU KAZGERMUNAI 2 Samruk-Kazyna JSC is the Fund, the sole shareholder OIL REFINERY KAZAKHTURKMUNAY NCOC PETROKAZAKHSTAN KUMKOL RESOURCESKAZAKHOIL AKTOBE of which is the Government of the Republic 3 KASHAGAN of Kazakhstan. 4 2 1 PETROKAZAKHSTAN KUMKOL TCO TENGIZ 2 4 RESOURCES 3 9.58% 1 2 4 TCO TENGIZ 2 EMBAMUNAYGAS 1 1 KAZGERMUNAI AMANGELDY GAS KARAZHANBASMUNAI ATYRAU TURGAI Samruk-Kazyna 3 OIL REFINERYMANGISTAUMUNAIGAZ KAZAKHTURKMUNAY NCOC NBK KAZAKHOIL AKTOBE KASHAGAN AMANGELDY GAS CASPI BITUM TURGAI KARAZHANBASMUNAI 2 1PETROLEUM PETROKAZAKHSTAN KUMKOL 3 MANGISTAUMUNAIGAZ RESOURCES 90.42% 3 OZENMUNAIGAS CASPI BITUM SHYMKENT OIL REFINERY (PKOP) 1 TCO TENGIZ 2 1 The Fund's mission is to improve the sovereign welfare OZENMUNAIGAS SHYMKENT OIL REFINERY of the Republic of Kazakhstan and ensure long-term sustainability (PKOP) for future generations. The Fund’s portfolio includes companies AMANGELDY GAS operating in oil and gas, transport and logistics sectors, chemical KARAZHANBASMUNAI TURGAI PETROLEUM 3 and nuclear industry, mining and metallurgical complex, energy, MANGISTAUMUNAIGAZ OPERATING PRODUCTIONS ASSETS OPERATIONAL OIL PIPELINE and real estate. CASPI BITUM MEGA PROJECTS OPERATIONAL GAS PIPELINE 1 OIL PUMPING STATION EXPLORATION AND PRODUCTIONOPERATING PRODUCTIONS ASSETS OPERATIONAL OIL PIPELINE OZENMUNAIGAS SHYMKENT OIL REFINERYHEAD OIL PUMPING STATION MEGA PROJECTS OPERATIONAL GAS PIPELINE (PKOP) COMPRESSOR STATION REFINING OIL PUMPING STATION EXPLORATION AND PRODUCTION

HEAD OIL PUMPING STATION

REFINING COMPRESSOR STATION 23.62 8.46 78.07 103.49 20.59OPERATING PRODUCTIONS ASSETS OPERATIONAL OIL PIPELINE MLN TONNES BLN M3 MLN TONNES BLN M3 MLNMEGA TONNES PROJECTS OPERATIONAL GAS PIPELINE OIL PUMPING STATION EXPLORATION AND PRODUCTION OIL AND CONDENSATE PRODUCTION GAS PRODUCTION OIL TRANSPORTATION GAS TRANSPORTATION OIL REFININGHEAD OIL PUMPING STATION

COMPRESSOR STATION REFINING

4 5 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

ASSET STRUCTURE KEY MARKETS

KMG’S SIGNIFICANT ASSETS INCLUDE

РеализацияOIL SALES нефти

30%

70%

Exports (, China) Domestic market

GAS SALES3 Реализация газа3

61%

UPSTREAM MIDSTREAM DOWNSTREAM OILFIELD SERVICES • JSC KazTransOil...... 90% 39% Mega projects • Pavlodar Refinery LLP...... 100% • KMG Nabors Drilling • Tengizchevroil LLP (TCO)...... 20% – Kazakhstan–China Pipeline • Atyrau Refinery LLP...... 99.53% Company LLP...... 49% • Karachaganak Petroleum LLP ...... 50% • PetroKazakhstan Oil Products LLP • KMG Parker Drilling Company LLP49%. Exports Operating B.V...... 10% – MunaiTas North-West Pipeline (Shymkent Refinery)...... 49.72% • KMG Automation LLP...... 49% (81% to China, 11% to Russia) • KMG Kashagan B.V...... 8.44%1 Company LLP...... 51% • KMG International...... 100% Domestic market – OJSC Batumi Oil Terminal – Petromidia Refinery...... 54.63% Operating assets: 100% – Vega Refinery...... 54.63% • JSC Ozenmunaigas ...... 100% • JSC Mangistaumunaigaz...... 50% • Caspian Pipeline • JSC Embamunaigas...... 100% Consortium...... 20.75%2 • JV Kazgermunai LLP...... 50% • LLP NMSC Kazmotransflot ...... 100% PETROLEUM PRODUCT • PetroKazakhstan Inc...... 33% • JSC KazTransGas...... 100% SALES • JSC Karazhanbasmunai...... 50% • Kazakhoil Aktobe LLP...... 50% – JSC Intergas Central Asia...... 100% • Kazakhturkmunay LLP ...... 100% – Asia Gas Pipeline LLP...... 50% 74% 26% • KazMunayTeniz LLP...... 100% – JSC KazTransGas Aimak ...... 100% – Beineu–Shymkent Gas Pipeline LLP...... 50%

• KazRosGas ...... 50%

Exports (Europe, China, Russia, Tajikistan) Domestic market 1. 3. In October 2015, Samruk-Kazyna acquired a 50% As the national gas operator KMG exercises stake in Kashagan with a right to purchase shares the state’s pre-emptive right to purchase raw under an option agreement in 2020 and 2022. 2. and commercial gas from subsoil users, supplies KMG and Samruk-Kazyna jointly hold 16.88% 19% via KMG and 1.75% via Kazakhstan Pipeline gas to the domestic market, and engages in export in Kashagan. Ventures. operations via its subsidiary JSC KazTransGas.

6 7 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

To monitor its financial position, KMG has identified the following segments: Exploration and Production, Oil Transportation, Gas Transportation and Marketing, Refining, KMG BUSINESS MODEL International, Oilfield Service and Other Companies. The segments were identified based on the nature of operations. Results in identified segments are regularly assessed by the Group’s management.

RESOURCES

EXPLORATION HYDROCARBON PRODUCTION MAIN PIPELINE CAPACITY LIQUID HYDROCARBON REFINING 16 exporation projects

PROVED PLUS PROBABLE mln tonnes per year RESERVES 6.5 Refining capacity in 23.62 mln tonnes 67.3 mln tonnes 103.5 bln m³ of oil and condensate (485 kbopd) Oil transportation Gas transportation 676 mmtoe (5.2 bln boe) 15 mln tonnes per year (net to KMG’s interest) 8.5 bln m³of gas Refining capacity in Kazakhstan

UPSTREAM MIDSTREAM DOWNSTREAM OTHERS EBITDA BY IFRS Exploration and production Oil transportation Gas transportation and marketing Refining, Trading, KMG I Sercie projects, Corporate centre, SEGMENT other assets

$ 5 126 MLN 49 % 11 % 23 % 14 % 3 %

• 100% fully consolidated • OMG...... (100%) • КТО...... (90%), • КТG...... (100%) • Atyrau refinery...... (99.53%), subsidiaries • EMG...... (100%) • КМТF...... (100%), • Parlodar refinery...... (100%), • KMG Karachaganak...... (100%) • KMG I...... (100%) • КТМ...... (100%)

• JV and Associates by equity • TCO...... (20%) • CPC...... (20.75%), • AGP...... (50%) • Shymkent refinery...... (49.72%), method • ММG...... (50%) • Others • BSGP...... (50%) • Others • Kashagan...... (8.44%) • KazRosGas...... (50%) • КGМ...... (50%) • Others • Others

The E&P segment comprises hydrocarbon (mainly oil) exploration, development, and production STAKEHOLDER VALUE companies. The Oil Transportation segment comprises KazTransOil, NMSC Kazmortransflot, and Caspian Pipeline Consortium engaged in oil transportation. The Gas Transportation Leadership and presence across all sectors of Kazakhstan’s oil and gas industry, and Marketing segment comprises KMG’s subsidiary KazTransGas. The Refining segment from exploration to product sales to consumers, enable KMG to create value for a wide comprises all refineries located in Kazakhstan (Atyrau Refinery, Pavlodar Refinery, Shymkent range of stakeholders. KMG makes regular payouts to shareholders, duly meets Refinery). KMG International is identified as a separate segment since it is an integrated, its obligations to investors and creditors, and is a major employer and taxpayer. diversified oil company operating in international markets and engaged in refining, petrochemical The Company promotes mutually beneficial cooperation with partners, invests production, oil and petroleum product sales. The Oilfield Service and Other Companies segment in social projects, and ensures high standards of environmental protection. comprises the oilfield service operations of KMG and other KMG Group companies engaged in non-core operations.

8 9 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KEY STRENGTHS

FULL INTEGRATION ACROSS THE VALUE CHAIN

KMG is the national leader in Kazakhstan’s oil and gas industry with a fully integrated added value chain.

As a national leader and a vertically integrated business, KMG has a strong foundation to support its long-term sustainable development. KMG’s assets comprise an entire hydrocarbon added value chain including exploration, production, transportation, refining, and marketing. The Company operates in Kazakhstan and Romania.

UNIQUE GEOGRAPHY KMG VALUE CHAIN

Upstream Midstream Downstream Kazakhstan has an extensive resource base, favourable The oil and gas industry is the leading economic sector location, and a unique opportunity to export to Europe and fast- in Kazakhstan. The oil and gas segment contributes Refining Marketing Tengiz, OMG, MMG, EMG, KGM, Karachaganak, growing Asian markets, including China. significantly to Kazakhstan’s aggregate income from taxes KTO, CPC, KKT, MT, KMTF Kashagan, KBM, PKI, KTM, KOA, AG Altyrau, Pavlodar, Shymkent, KMGI, Trading AG and exports and remains a key investment destination. Foreign CB, Petromidia, Vega Kazakhstan’s economy has grown eleven-fold over the last direct investments (FDI) into the industry were at higher than 20 years due to political and social stability, natural resources USD 70 bln over the last decade. The presence of global energy Transit oil development, and enhanced industrial infrastructure. majors evidences Kazakhstan as an attractive investment Transit Trading of Oil production volumes transportation oil and oil products region. Kazakhstan is among the Top 5 non-OPEC countries by the remaining 2P oil reserves.1

Oil pipelines Domestic KZ and Export oil and tankers transportation KMGI refineries products sales

TOP 5 NON-OPEC COUNTRIES BY CONVENTIONAL OIL RESERVES KAZAKHSTAN'S GDP, USD BLN REMAINING 2P OIL RESERVES, BLN BARRELS (2019) A PRELIMINARY ESTIMATE OF GDP FOR 2019 AS OF 24 FEBRUARY 2020 Other oil Export Domestic 179 producers transportation oil products sales Russia 136 Associated gas Brazil 51 115 Transit USA 32 Transit Gas Purchase Gas production gas volumes transportation China 31 17

Kazakhstan 25 1999 2009 2019 Export Export Gas pipelines transportation gas sales Source: IHS Markit Source: Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstan Based on EDIN & Vantage Data as of 18 January 2020, excluding North American unconventional reserves (e.g., US onshore and Canada ) Other Domestic Domestic gas producers transportation gas sales

Tengiz, OMG, MMG, EMG, KGM, Karachaganak, 1. ICA, AGP, BSGP, KTG Aimak KTG, KGTA IHS Markit’s estimates. Kashagan, KBM, PKI, KTM, KOA, AG

10 11 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

SOLID FINANCIAL PERFORMANCE EBITDA AND OIL PRICES 71.3 64.2 54.2 Despite heightened volatility of commodity markets and lower oil prices in 2019, financial performance remained solid. 4,947 5,126 EBITDA, USD mln The average Dated Brent oil price decreased by 10% year-on- Dated Brent average, $/bbl year, while key financial indicators, such as EBITDA, Free Cash 3,369 Flow, and Net profit showed positive growth dynamics (3.6%, 27.5% and 50.5%, respectively).

2017 2018 2019 Source: S&P Global Platts

DIFFERENTIATED UPSTREAM PORTFOLIO

KMG has a differentiated portfolio of oil and gas production assets with attractive growth potential. 2P reserves life of oil & condensate (based on 2019 oil and condensate production level) The Company also has unique access to new licenses and oil is at 23 years. and gas assets put on sale in Kazakhstan to sustain inorganic growth.

KMG partners with international companies for major oil and gas projects on a global scale with the potential 26% 15% share of total oil share of total to boost hydrocarbon production: Tengiz, Kashagan, Karachaganak. Operating assets are mainly mature fields & condensate gas production with stable production levels, efficiency improvement of which production in Kazakhstan is considered as a key objective for the Company. in Kazakhstan

MODERN OIL REFINERIES ADVANCED CORPORATE GOVERNANCE FRAMEWORK AND COMMITMENT TO SUSTAINABLE DEVELOPMENT The Company operates the four largest refineries in Kazakhstan and two in Romania. As a result of their comprehensive 81% PRINCIPLES modernisation, KMG improved refining depth. Domestic share of total oil refining demand for high-quality light petroleum products was fully in Kazakhstan covered. In addition, KMG started exporting light petroleum KMG is committed to environmental sustainability and social products to Europe and Central Asia. stability and recognises its responsibility to current and future generations.

LEADING POSITION IN KAZAKHSTAN’S MIDSTREAM SECTOR

The oil transportation system managed by KMG is well- diversified and has a high transit and export potential. Active investment phase in this segment has been completed, 57% 79% and the capacities have been ramped up to meet the needs of oil transportation of gas transportation The World Bank Initiative UN 17 Sustainable CDP Climate Program Global Methane Initiative of growing production volumes in Kazakhstan. volumes volumes «Complete Cessation Development Goals in Kazakhstan in Kazakhstan of Regular Flaring of APG Initiative by 2030»

12 13 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

PERFORMANCE HIGHLIGHTS

OPERATIONAL HIGHLIGHTS

2P HYDROCARBON RESERVES, OIL AND GAS CONDENSATE PRODUCTION, NATURAL AND ASSOCIATED GAS PRODUCTION, OIL TRANSPORTATION, GAS TRANSPORTATION, OIL REFINING, MLN TONNES THOUS. TONNES MLN M3 THOUS. TONNES MLN M3 THOUS. TONNES

2019 676 2019 23,618 2019 8,455 2019 78,066 2019 103,494 2019 20,588 2018 23,606 2018 8,137 2018 75,038 2018 111,567 2018 19,715 2017 2017 2017 74,815 2017 100,857 2017 18,207 23,362 7,996

38 For more details see the Operating Review section

FINANCIAL HIGHLIGHTS SOCIAL HIGHLIGHTS

REVENUE, EBITDA, SHARE IN PROFIT OF JVS AND ASSOCIATES, ACTUAL NUMBER LOST TIME INCIDENT RATE (LTIR), FATAL ACCIDENT RATE (FAR), USD MLN USD MLN USD MLN OF EMPLOYEES1 PER 1 MLN MAN-HOURS PER 100 MLN MAN-HOURS

2019 17,915 2019 5,126 2019 2,163 2019 70,938 2019 0.31 2019 1.28 2018 20,255 2018 4,947 2018 2,021 2018 76,229 2018 0.32 2018 0.65 2017 14,701 2017 3,369 2017 1,273 2017 80,406 2017 0.42 2017 3.25

1. From 2019 the Company revised the methodology to calculate the Actual number 92 For more details see the Occupational health NET PROFIT, CAPITAL EXPENDITURES BASED ON ACCRUED CAPITAL EXPENDITURES BASED ON CASH BASIS, of employees (calculation includes employees from the companies with share of 50% and safety section and more). Figures for previous periods were also recalculated. USD MLN BASIS, USD MLN USD MLN

2019 3,026 2019 1,320 2019 1,160 2018 2,010 2018 1,820 2018 1,247 ENVIRONMENTAL HIGHLIGHTS 2017 1,611 2017 2,051 2017 1,424

NOX EMISSIONS, TONNES PER SOX EMISSIONS, TONNES PER 1,000 TONNES APG FLARING RATE, TONNES PER 1,000 TONNES 1,000 TONNES OF PRODUCED OF PRODUCED HYDROCARBONS OF PRODUCED HYDROCARBONS FREE CASH FLOW, NET DEBT, NET DEBT/EBITDA, X HYDROCARBONS USD MLN USD MLN 2019 0.21 2019 0.20 2019 2.95 2019 1,537 2019 6,171 2019 1.20 2018 0.20 2018 0.25 2018 6.0 2018 1,206 2018 5,661 2018 1.14 2017 2017 2017 2017 2017 2017 0.25 0.32 11.0 1,066 4,062 1.21 0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0 2 4 6 8 10 12

72 For more details see the CFO financial review section 81 For more details see the Sustainability management section

14 15 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

CORPORATE GOVERNANCE In line with our commitment to follow the United Nations Sustainable Development Goals, in 2020 we will incorporate key STATEMENT FROM THE CHAIRMAN The Board of Directors accords corporate governance a high goals into our strategy, business plans and operations. In 2020 priority and seeks continuous improvement. we also intend to obtain an international ESG rating and include a Water Disclosure Project in our Sustainability Report. OF THE BOARD OF DIRECTORS KMG’s Board is currently composed of four independent directors, four directors nominated by the major shareholder I am particularly proud that 2019 saw the launch of the Health, (of whom three are non-executive directors), and the Chairman. Safety, Environment and Sustainable Development Committee Dear Investors, Shareholders, Colleagues The Chairman of the Board and all Committee Chairmen under the Board of Directors. This demonstrates the Board’s are independent directors, which brings a unique commitment to best practice, and contributes to our improved and Partners, and professional perspective to all important issues related performance in this area. to the Company’s operations. The Board’s composition is aligned with our skill and expertise matrix. I am pleased to report that the continued effort STAKEHOLDER ENGAGEMENT and commitment of our management team and employees In 2019, Mr Luís Maria Viana Palha da Silva was appointed delivered positive results in 2019. We successfully met to the Board as an Independent Director and was elected I believe it is important to maintain regular dialogue with all many of our important objectives and achieved positive as the Chairman of the Nomination and Remuneration stakeholders, investors, partners, and our employees. During operating and financial results. This underpins the steady Committee. Luís has experience in oil refining 2019, in line with monitoring the implementation of strategic growth of our Company and increases shareholder value. and petrochemicals, which will greatly benefit the Company initiatives our independent directors visited a number of KMG It was achieved by strengthening our financial position as we ramp up production at our upgraded refineries. production sites, including JV Kazgermunai, PetroKazakhstan and by maintaining stable production levels at both our own Oil Products, and Shymkent Refinery. I intend to continue assets, as well as joint projects. I would also like to welcome Mr Anthony Espina, as a new non- this practice by visiting several production sites this year. executive Director, nominated by our major shareholder. He has In addition, my fellow directors and I hold regular meetings considerable experience in equity markets and is an invaluable with the Company’s top and middle management. I also asset to KMG as we continue to improve our financial stability participated in meetings with Eurobond holders and investors and evaluate IPO options with our majority shareholder. as part of the roadshows.

STRATEGY In 2019, the Board of Directors expanded the range of issues KazMunayGas looks to the future with confidence that it has asked committees to oversee and review in depth. and is committed to maintaining the highest international During the year, we continued to work towards our strategic goals Fitch Ratings in March 2019 and Moody’s in August 2019 These measures were aimed at allowing the Board to focus standards and corporate best practices. and we successfully achieved the Company’s key 2019 financial to upgrade KMG’s standalone credit rating. Both agencies have on key strategic issues without compromising the quality and operational goals and objectives. Our operational results us at investment grade and one rating at two notches below and effectiveness of Board oversight. 2019 was a successful year for the Company, driven in 2019 confirmed KMG’s role as the vertically integrated market the sovereign rating of the Republic of Kazakhstan. by the strong leadership of Mr Alik Aidarbayev, in his first full leader in the country’s oil and gas sector. year as Chairman of the Management Board. KMG continues During our recent capital-intensive period, we maintained strong to become a stronger, safer and more financially robust In order to deliver on KMG’s strategic objective of growing capital discipline and kept our debt leverage to an appropriate SUSTAINABILITY business, which benefits our shareholders, our employees our reserves, we signed two exploration and production level. Although our 2019 capex was $1.3 bln, we had free cash and the Republic of Kazakhstan. contracts with major international oil companies: and . flow of about $1.5 bln and a stable balance sheet. Looking We have a strong commitment to sustainability and improving These contracts are in regard to the Abay and Zhenis offshore forward we expect to commercialize the benefits of our well- the transparency of our ESG performance. For the last 4 Chris Walton, projects. Additionally, a heads of agreement for the I-P-2 project vested asset portfolio. years, we have significantly enhanced our environmental Chairman of the Board of Directors of “NC KazMunayGas” JSC was signed with LUKOIL, as well as several other agreements and safety performance with major improvements and memoranda with BP, , LUKOIL, Tatneft, and Socar. We During the last two years we have worked on analyzing in key indicators. Lost Time Injury Rate decreased by 37%, anticipate further progress on joint ventures and collaborations and prioritizing investment projects and we plan to adopt Fatal Accident Rate fell by 72%, CO2 emissions dropped in 2020. an increasingly regimented portfolio management approach by 12% and APG flaring intensity was lowered by 75%. based on the criteria of each project’s profitability index, how Notwithstanding these improvements, I would like to stress We continue to follow our 10-year strategy, approved in 2018, it fits with our strategy and its cost. that zero injuries and fatalities in the workplace are the only while also regularly reviewing it to ensure it remains relevant acceptable results and we will continue to strive to meet and fit for purpose. When implementing our strategy With respect to a possible IPO of the Company, you will be aware these targets. In 2019, we published our Sustainability and KPI framework in 2019, we focused on updating the high- that KMG is a part of the government’s privatisation programme. Report in line with GRI Standards and we became level initiatives for our gas segment. Currently we are working A final decision on any IPO will be made by our major the first oil and gas company in Kazakhstan to publish on a more detailed gas strategy, which is likely to shift the Group’s shareholders and will depend on various factors. a verified report on greenhouse gas emissions (Scope 1, 2 production mix from predominantly crude oil to a more balanced and 3) under the Carbon Disclosure Project. This discloses gas and liquid production mix. the Company’s performance and development plans for global climate change adaptation. The CDP Report also allows To help reduce our financial and non-financial commitments, us and our stakeholders to benchmark our environmental we accelerated our payment schedule for crude oil progress against peers and other companies. and liquefied petroleum gas supplies under the Tengizchevroil prepayment facility. In total, we paid down 2.25 bln USD in 2019 for the settlement of TCO prepayment facilities. Within the last two years we have also extended our debt maturity profile by converting short-term debt into long-term debt and aligning the covenant packages of our Eurobonds. This prompted

16 17 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

CHIEF EXECUTIVE OFFICER’S STATEMENT

FURTHER ESG IMPROVEMENTS KMG IN KAZAKHSTAN Dear Investors, Shareholders, Colleagues and Partners, We work constantly to improve operational safety, In the past year, KMG once again confirmed its status but regretfully in the second half of 2019 we lost two employees as one of the largest taxpayers in Kazakhstan, having paid in a highway traffic accident and a fire in living quarters. Any about USD 4 bln in taxes and other mandatory payments fatal accident is unacceptable to us, and I would like to express to the national budget. 2019 was another successful year of strategic delivery once again my sincere condolences to the families and friends for KMG. We significantly strengthened our financial position of the deceased. Our social responsibility strategy aims to facilitate development and achieved a positive operational performance while making across our operating regions. During the year, we spent 7.6 further improvements in occupational safety. Despite these tragedies, we managed to reduce the overall bln tenge on social investments under subsoil use contracts injury rate in 2019 by 4%, the number of major (critical) accidents across KMG Group. Furthermore, KMG allocated 22.8 bln was down by 11%, and the number of traffic accidents and fires tenge to develop infrastructure in Turkistan as instructed were reduced by 33% and 17%, respectively, year-on-year. by the Government of the Republic of Kazakhstan.

We also made considerable progress in raising In 2020, we will progress towards the targets announced the APG utilisation rate to 97% in 2019. Another major in our development strategy and further maximise efficiencies achievement was a step forward in sustainable water use: across our business processes to stay agile in an ever-changing in the reporting year, we signed a Statement of Commitment environment. We are committed to openness and transparency to Sustainable Water Management and implemented several in our relations with all stakeholders. GOOD OPERATING PERFORMANCE large-scale projects to treat wastewater and saltwater. AND FINANCIAL STABILITY To conclude, I would like to thank each and every member of our team for their dedication and commitment Our full-year results demonstrate that KMG is strongly We have maintained our focus on strengthening our financial and for working so well together to deliver our corporate values. positioned, and comfortably on track, to achieve its strategic stability. Despite falling Brent prices, our EBITDA increased goals. I am proud of the operational targets we have achieved. slightly year-on-year to USD 5.1 bln. We reduced our debt load majorly by accelerated settlement of TCO prepayment facilities. We produced more than 23.6 mln tonnes of oil and gas We have also balanced out our debt portfolio through steps, Alik Aidarbayev, condensate, slightly above our 2018 results. in recent years, to convert short-term into long-term debt Chairman of the Management Board of NC KazMunayGas JSC and aligning our Eurobond covenants. Gas exports were a key growth driver for KMG during the year, with 103.5 bcm of gas transported via trunk pipelines. Our gas In 2019 we reset our Transformation Program: we are increasing exports stood at 8.8 bcm, of which around 7 bcm were sent the level of our assets digitalization to improve our operational to China. performance. Thus, we create conditions for integrating our Сompany’s business into new digital reality, which Three refineries reached a record annual throughput of almost is a critical requirement at present times. 17 mln tonnes of oil. In 2019, we fully met the domestic demand for light products and started exports to neighbouring countries Additionally during the year, we put considerable effort for the first time in KMG’s history. into engaging strategic partners in new upstream projects and expanding relations with international oil and gas majors We have made considerable progress on the Future Growth like ENI, LUKOIL, BP, EQUINOR and TATNEFT in exploration. Project at Tengiz, one of our key expansion projects. TCO partners approved the increase of the total project budget In 2019, we adopted international reserve estimation standards from USD 37 bln to around USD 45 bln due to higher costs to underline our commitment to transparency. Our proven of services and equipment. plus probable (2P) hydrocarbon reserves stood at 5.2 bln boe at the end of 2019, leaving us well-positioned to focus on driving In 2019, Kashagan reached a new peak production of 400 further economically viable reserve growth. thousand barrels per day, with the average daily output in 2019 being 307 thousand barrels per day.

18 19 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

STRATEGY MARKET OVERVIEW

MACROECONOMICS AND GLOBAL TRENDS

GLOBAL TRENDS AND SHORT-TERM CHANGES IN THE GLOBAL FUEL AND DYNAMIC DIGITALISATION AND AUTOMA- INCREASING SIGNIFICANCE OF ESG HYDROCARBON PRICE VOLATILITY DRIVERS ENERGY BALANCE TION IN THE INDUSTRY IN BUSINESS COMMUNICATION

Increase in demand for liquid fuel Development and implementation Introduction of best practices Oil prices are affected by both CHALLENGE FOR THE INDUSTRY in non-OECD Asia. of Smart Field technology, digitali- in ESG as a trend in the oil and gas fundamental and geopolitical Increase in global demand sation and automation of business industry. factors, which results in high price for gas, including demand in China processes in the oil and gas industry. volatility. as the main driver.

Market expansion KMG is implementing Digital Integrating sustainability principles KMG is focused on maintaining STRATEGIC RESPONSES TO TRENDS and diversification through Transformation Programme. into core business processes its financial stability, in particular developing oil and gas midstream is a key element of KMG’s long-term through financial discipline, capacities. strategy. and maintaining a well-balanced capital structure.

20 21 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

CHANGES IN THE GLOBAL FUEL AND ENERGY BALANCE INCREASE IN GLOBAL DEMAND FOR GAS INCREASE IN NATURAL GAS DEMAND IN CHINA DIGITALISATION

According to the International Energy Outlook by the US Energy As a fossil fuel with a relatively low carbon footprint, natural gas According to the National Development and Reform Commission At present, digital technology penetrates in all economic Information Administration (EIA) dated 24 September 2019, plays a critical role in balancing solar and wind energy. Global of the People’s Republic of China, apparent natural gas sectors, allowing fundamental improvements in efficiency energy consumption in non-OECD countries will increase gas demand will remain solid in the long term. consumption CAGR in 2012–2019 was at 15.4%. In 2019, apparent and safety. Energy is also no exception: leading oil and gas by about 70% between 2018 and 2050 versus 15% in OECD gas consumption was at 306.8 bln m³, having increased by 10.0% companies around the world efficiently use Big Data, predictive countries. According to the International Energy Outlook by the US Energy year-on-year. analytics, artificial intelligence, machine learning, robots, etc. Information Administration, global natural gas consumption Non-OECD countries will account almost exclusively for liquid will increase by more than 40% between 2018 and 2050, while As Gas Company estimated in its report dated Innovative digital technology means: fuel consumption growth between 2018 and 2050, following in non-OECD countries the increase will reach 70%. 15 October 2019, the long-term gas demand in China will reach • reduced capital expenditures and operating expenses; population growth and economic development. Non-OECD Asia 510 bln m³ by 2030, supported by continued industry upgrades • better profitability amidst volatile oil prices; accounts for about three-fourths of the increase in global liquid and urbanisation. In August 2019, CNPC Economics & Technology • improved efficiency, including through data analysis; fuel consumption. Research Institute estimated China’s gas demand at 610 bln m³ • better failure prediction; by 2035, and 690 bln m³ by 2050. • process safety.

STRATEGIC DIRECTION Digitalisation can become the engine of the national economy. KMG considers global trends in liquid fuel and natural gas STRATEGIC DIRECTION Digitalisation will become a driver for the development and seeks to maximise the efficiency of its oil transportation KMG aims to implement a number of initiatives to ensure and adaptation of new technologies to the economy infrastructure to increase oil exports. In particular, +10% sufficient reserves of commercial gas and adequate pipeline of Kazakhstan, which would allow launching a new wave of job by developing the Kazakhstan–China Pipeline, KMG will gas consumption in China in 2019 capacities to boost exports to China while meeting growing creation. ensure hydrocarbon supply from Western Kazakhstan domestic demand. The Kazakhstan–China trunk gas pipeline, fields to the high-potential Chinese market, and the Caspian and Beineu–Bozoi–Shymkent trunk gas pipeline are the key Given the growing relevance of digitalisation in the world, Pipeline Consortium is a key component of the transportation projects to unlock KMG’s potential for natural gas exports the state has launched the Digital Kazakhstan state programme infrastructure targeting Europe. to China. to ensure the country’s competitiveness.

The program covers almost all economic sectors, including the oil and gas industry, for which it provides: GLOBAL ENERGY CONSUMPTION, QUADRILLION BTUs GLOBAL NATURAL GAS CONSUMPTION, QUADRILLION BTUs • adopting the Smart Field technology across Kazakhstan’s

150 upstream majors; 1,000 actual forecast actual forecast NATURAL GAS CONSUMPTION IN CHINA, BLN M3 • ensuring transparency of commercial oil production reports 120 800 by deploying metering systems; 2019 306.8 • Ensuring uninterrupted domestic fuel supplies by deploying 600 90 non-OECD countries 2018 278.9 automated maintenance and repair management, 400 60 and control systems, as well as repairs at Kazakhstan’s 2017 237.2 refineries. 200 30 OECD countries 2010 2020 2030 2040 2050 2016 205.9 0 The ongoing rollout of the Smart Field project is implemented 2010 2020 2030 2040 2050 Non-OECD countries OECD countries 2015 193.0 at JSC Embamunaigas, JSC Ozenmunaigas, JV Kazgermunai LLP Source: US Energy Information Administration, Report “International Energy Source: US Energy Information Administration, Report “International Energy under the Digital Kazakhstan programme. Outlook 2019” dated 24 September 2019 Outlook 2019” dated 24 September 2019 Source: National Development and Reform Commission of the People’s Republic of China, Bloomberg STRATEGIC DIRECTION The company will focus on the implementation of the Digital LIQUID FUEL CONSUMPTION BY OECD COUNTRIES, QUADRILLION BTUs LIQUID FUEL CONSUMPTION BY NON-OECD COUNTRIES, QUADRILLION BTUs Transformation Program with a focus on the implementation of new digital technologies, a data-oriented approach to management, as well as the formation of digital culture. 2050 2050 34 23 31 23 18 12 16 47 24 16 As part of the implementation of the corporate strategy in 2020, 2040 45 24 15 the Company began to develop KMG Digitalisation Strategy. 2040 34 19 25 21 14 11 15 2030 45 26 15 2030 33 14 21 20 12 12 14 2020 48 28 15 forecast

2010 46 29 15 actual 2020 30 10 19 19 10 12 13 forecast

Americas Europe Asia 2010 20 7 15 15 7 10 13 actual

China India Other Asian Countries Middle East Source: US Energy Information Administration, Report “International Energy Africa Europe and Asia Outlook 2019” dated 24 September 2019 Source: US Energy Information Administration, Report “International Energy Outlook 2019” dated 24 September 2019

22 23 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

DEVELOPING ESG PRACTICES VOLATILITY OF CRUDE OIL PRICES INTERNAL DRIVERS AND THEIR IMPACT In September 2015, the leaders of 193 countries approved In 2019, futures traded averaged at USD 61.9 per ON STRATEGY IMPLEMENTATION an ambitious comprehensive programme Transforming bbl, down by 6.6% year-on-year. During the year, crude oil prices our World: the 2030 Agenda for Sustainable Development, remained volatile (with 30-day volatility1 at 28%), higher than which included Sustainable Development Goals. Combating in 2018 (20%), due to heightened geopolitical risks. climate change and transforming energy systems are key challenges to a sustainable future for the business community, On 19 March 2020, Brent crude settled at USD 28.47 per bbl, KAZAKHSTAN’S OIL AND GAS INDUSTRY OIL AND CONDENSATE PRODUCTION society and the environment. The Paris Agreement sent a strong having decreased by 56.0% year-to-date, amidst the coronavirus mln tonnes mbopd and global message that the transition to a low-carbon economy pandemic, and higher expected oil supplies. The COVID-19 Kazakhstan’s wealth of hydrocarbon reserves make 2 is inevitable. Kazakhstan’s Intended Nationally Determined outbreak is expected to slow economic growth and suppress oil the oil and gas industry a key sector of the national economy. 90 Contribution (INDC) to the Paris Agreement is to reduce demand in the short-term. Kazakhstan has extensive hydrocarbon resources to support 75 the country’s GHG emissions by 15% (unconditional goal) reserves growth. More than 60% of Kazakhstan’s territory 60 1 compared to the 1990 base year or, even more ambitiously, On 6 December 2019, the 7th OPEC and non-OPEC Ministerial is occupied by oil and gas areas of various sizes. 45 by 25% (conditional goal) by 2030. Meeting decided to increase crude oil production cuts by a further 30 500 kbopd, bringing the total production cut to 1.7 mbopd, starting The oil and gas industry accounts for approximately 21% 15 0 from 1 January 2020. of Kazakhstan’s total GDP (in 2018). The crude oil and natural 1990 2000 2010 2019 STRATEGIC DIRECTION gas production sector attracted 50% of gross FDI inflows In making decisions, KMG factors in the national and global in 2019. The export of crude oil, natural gas, and petroleum Source: Statistics Committee of the Ministry of National Economy of the Republic trends for a transition to a greener economy and recognizes STRATEGIC DIRECTION products safeguards export revenues at a level of 64% of total of Kazakhstan, the Information and Analytical Centre of Oil and Gas of the Ministry of Energy of the Republic of Kazakhstan 1 that long-term success in the industry requires strong On the COVID-19 outbreak, KMG takes a proactive approach exports in 2019 . ESG performance. As a signatory to the UN Global Compact, and implements a set of measures, aimed at curbing the potential KMG reiterates its commitment to the principles of sustainable spread of the virus among employees. As production expanded over the past decades, Kazakhstan has GAS PRODUCTION, BLN M3 development and embraces Sustainable Development Goals significantly consolidated its position in the global hydrocarbon 60 while particularly focusing on climate change, prevention market. In the medium and longer-term, Kazakhstan will 50 of adverse environmental impact, and corporate social continue to grow production. 40 responsibility. 30 According to the Information and Analytical Centre of Oil 20 and Gas, 90.6 min tonnes of crude oil and gas condensate were produced in Kazakhstan in 2019, with a marginal change 10 compared to 2018. Gas production was at 56.4 bln m3 in 2019, 0 BRENT CRUDE OIL PRICES, $/BBL up by 1.7% year-on-year. 1990 2000 2010 2019

Source: Statistics Committee of the Ministry of National Economy of the Republic Kazakhstan has a modern and diversified oil and gas of Kazakhstan, the Information and Analytical Centre of Oil and Gas of the Ministry 80 28 January 2019: The US imposed 1 July 2019: Extension of OPEC+ 11 October 2019: Announcement of Impact of the transportation, refining and processing infrastructure. Oil of Energy of the Republic of Kazakhstan sanctions on Venezuela`s oil industry deal to 31 March 2020. the first phase of a deal between the COVID-19 outbreak transportation is a strategic segment in KMG’s asset portfolio US and China to maintain access to markets. 70 STRUCTURE OF OIL AND CONDENSATE EXPORT SUPPLIES, % (2019) KMG has diversified hydrocarbon transportation routes 3 1 1 and built a transportation infrastructure to support gas exports 60 10 May 2019: The US imposed to China. 18 77 the tariff increase on a USD 200 bln list of Chinese goods According to the Information and Analytical Centre Caspian Pipeline Consortium 50 Samara 1 and 5 August 2019: Elevated 6 December 2019: OPEC+ announced of Oil and Gas of the Ministry of Energy, the refining volume US-China trade disputes additional oil production cuts at Kazakhstan refineries was 17.1 mln tonnes in 2019, a 4.4% Port of Aktau Kazakhstan–China Pipeline increase year-on-year. The output of oil products increased 40 (Atasu–Alashankou) by 15.5% year-on-year for petrol, 7.7% for diesel, and 63.2% 8 March 2020: Two top producers Rail planned to raise production for jet fuel. In the medium term, a surplus for oil products after the OPEC+ deal is expected in the domestic market, a positive driver 30 for exports.

Source: The Information and Analytical Centre of Oil and Gas of the Ministry of Energy based on the data provided by transportation companies) 20 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20

Source: Bloomberg

1. HS Code 2709 - crude oil and crude petroleum products derived from bituminous rocks, HS Code 2711 - other petroleum gases and gaseous hydrocarbons, HS Code 2710 - oil and petroleum products derived from bituminous rocks, other than crude ones. 1. Annualised standard deviation of daily logarithmic price changes for the last 30 trading days.

24 25 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

In 2015, the NBK introduced inflation targeting and reduced GOVERNMENT DEBT FAVOURABLE ECONOMIC CONDITIONS inflation from a double-digit rate of 17.7% in July 2016 The level of government debt is among the lowest in most IN KAZAKHSTAN IN 2019 4.5% to 5.3% in December 2018 and 5.4% in December 2019, emerging markets. According to Fitch rating’s estimates, gross GDP growth in 2019 in line with the NBK’s inflation target of 4–6% for 2019–2021. general government debt was at low of 18.2% of GDP at year- In December 2019, inflation expectations were stable and close end 2019, compared to ‘BBB’ median of 41.1%. Economic conditions in Kazakhstan are favourable given to underlying inflation. the expected positive economic growth in the medium-term, stable fiscal and monetary policies, and the government’s The national economy is resilient, with Kazakhstan GDP GROWTH, % NATIONAL FUND’S ASSETS push for structural reforms. With a GDP of USD 179 bln in 2019, demonstrating a sustainable economic growth rate of 4.2% The National Fund’s assets remain solid, accounting for 34.4% Kazakhstan is the largest economy in Central Asia, accounting on average over the past 10 years. GDP growth in 2019 was 8 of GDP at year-end 2019. Going forward, this figure is expected for about 60% of the region’s GDP. at 4.5%, outpacing the growth rates in 2014–2018. 6 to exceed 30% of GDP in accordance with the Concept for the Formation and Use of Funds of the National Fund 4 of the Republic of Kazakhstan. The main purpose of the National 2 Fund is to preserve financial resources through building CENTRAL ASIA’S ECONOMIC INDICATORS savings for future generations of the country and reducing 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 the dependence of the state budget on the dynamics of commodity markets. Uzbekistan Indicators Kazakhstan Indicators Source: Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstan GDP, USD bln (2018) 50.5 GDP, USD bln (2019) 179

GDP growth, % (2018) 5.1 GDP growth, % (2019) 4.5 On 10 March 2020, the NBK made an unplanned decision 34.4% of the National Fund’s assets to GDP External trade, USD bln (2018) 28.2 External trade, USD bln (2019) 96.1 on the base rate to maintain price stability amidst heightened external risks. The NBK increased the base rate to 12% Exports, USD bln (2018) 10.9 Exports, USD bln (2019) 57.7 with widened interest rate corridor to +/- 1.5 pp from 9.25% INVESTMENT AND BUSINESS CLIMATE Imports, USD bln (2018) 17.3 Imports, USD bln (2019) 38.4 (interest rate corridor: +/- 1 pp). Over the past two years, Kazakhstan has jumped 11 places in the World Bank Doing Business 2020, now ranking 25th Moody’s|S&P|Fitch B1|BB-|BB- Moody’s|S&P|Fitch Baa3|BBB-|BBB In line with the inflation targeting regime, floating exchange out of the 190 countries. Kazakhstan ranks 7th among 190 rates were introduced in 2015. The NBK reserved the right countries in “Protection of minority investors” indicator. to smooth out significant exchange rate fluctuations through The Government has successfully implemented reforms interventions. pursued under the Concept of State Regulation of Business Activity until 2020. In 2019, the Government continued At year-end 2019, Kazakhstan’s tenge settled at 382.6 vs. US to consider new legislative initiatives to foster an enabling Kyrgyzstan Indicators Dollar. In 2019, tenge traded on average at 382.9 vs. US Dollar, business environment in the country. In 2005 – 2019, gross FDI GDP, USD bln (2018) 8.1 having weakened by 11.0% year-on-year. On 19 March 2020, inflow in Kazakhstan amounted to approximately USD 314 bln tenge settled at 448.5 vs. US Dollar, implying a 17.2% weakening from 120 counties. GDP growth, % (2018) 3.5 year-to-date, largely reflecting a drop in oil prices. External trade, USD bln (2018) 6.7 th Exports, USD bln (2018) 1.8 KZT/USD VS. BRENT CRUDE PRICES 25 place Imports, USD bln (2018) 4.9 taken by Kazakhstan in the 2020 Doing 470 80 Moody’s|S&P|Fitch B2|-|- Business ranking 450

430 STRATEGIC DIRECTION 410 40 The investment-grade sovereign credit ratings support KMG’s credit ratings, contributing to KMG’s strategic initiatives 390 in maintaining access to international capital markets. 370 Turkmenistan Indicators Tajikistan Indicators 350 0 GDP, USD bln (2018) 44.1 GDP, USD bln (2018) 7.5 KZT/USD Brent, $/bbl (rhs)

GDP growth, % (2018) 6.2 GDP growth, % (2018) 7.3 Source: Bloomberg, the National Bank of Kazakhstan External trade, USD bln (2017) 18.0 External trade, USD bln (2018) 4.3 Exports, USD bln (2017) 7.8 Exports,USD bln (2018) 1.1 Since 2004, Kazakhstan’s sovereign credit ratings from leading Imports, USD bln (2017) 10.2 Imports, USD bln (2018) 3.2 rating agencies S&P, Moody’s, and Fitch have remained Moody’s|S&P|Fitch - Moody’s|S&P|Fitch B3|B-|- at investment grade.

Moody’s S&P Fitch

Kazakhstan Baa3 BBB- BBB Source: Statistics Committee of the Ministry of National Economy of the Republic (positive) (stable) (stable) of Kazakhstan (CIS Key Indicators), Bloomberg (ratings as at 16 March 2020), Intracen (Kazakhstan’s foreign trade) As of 16 March 2020

26 27 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KAZAKHSTAN’S NEW ENVIRONMENTAL CODE NEW EXPLORATION PROGRAMME STRATEGIC PRIORITIES

On 24 December 2019, the Government approved a draft In the first half of 2020, a draft State Geological Exploration In 2019, KMG’s Development Strategy was extended in terms of gas of the new Environmental Code of the Republic of Kazakhstan. Programme for 2021–2025 is expected to be considered reserves increase and assurance of efficient gas use in the domestic At the end of 2019, the draft Environmental Code, prepared by the Government, outlining a range of measures to improve market. These changes were directly related to the expected increase with consideration to public opinion and OECD best practices, legislation, attract investment by offering tax incentives, was submitted to the Majilis (Lower Chamber) of Kazakhstan’s and simplify the regulation of subsoil use. in natural gas consumption in Kazakhstan and the Company’s intention Parliament. The draft is currently under consideration to leverage the export and transit potential of natural gas. and scheduled to enter into force on 1 January 2021. The programme aims to step up exploration activities To implement the new Environmental Code, the Government in promising underexplored areas of Kazakhstan. of Kazakhstan has started developing the Best Available The state investment will be provided to encourage geological Techniques Not Entailing Excessive Costs (BATNEEC) guidelines and geophysical studies in five promising basins: Aral, Syr Darya, with the involvement of the International Green Technologies Priirtysh, Shu-Sarysu, North-Turgai. and Investment Projects Centre (the “Centre”). In 2020, MISSION the Centre plans to conduct comprehensive technology audits According to KAZENERGY Association’s 2019 report, extensive Ensuring maximum of KMG refineries and upstream assets. exploration programmes in previous years have resulted shareholder benefits in a huge wealth of geological and geophysical data, minimising from the development For more details see the Sustainability management section the geological risk in selecting new prospects for subsoil use. Vast exploration opportunities in the promising underexplored areas of the national oil of Kazakhstan support the investment case for the oil and gas and gas sector VISION STRATEGIC DIRECTION industry. A highly effective, vertical integrated Company – National Oil and Gas KMG is a key stakeholder in the development of environmental legislation. KMG is an active member of relevant associations KMG’s Geology and Exploration team is strongly focused Leader that meets the highest safety and corporate governance and ministerial-level working groups, taking an active role on analysis and modelling of petroleum systems within the main standards in the development and discussion of the new version sedimentary basins of Kazakhstan, such as the Caspian, of the Environmental Code of the Republic of Kazakhstan. In 2019, Mangyshlak, Ustyurt-Bozashin, and South-Turgai. This the Company approved its Environmental Policy as prioritised contributes to the investment appeal of hydrocarbon exploration by the development strategy. KMG and its subsidiaries take in Kazakhstan. STATEGIC VALUE CREATION FOR SHAREHOLDERS DIGITALIZATION a zero-tolerance approach to environmental harm caused GOALS BY IMPROVING PRODUCTION EFFICIENCY AND PROCESS by pollution. Rolled out in 2019, KMG Group’s Emissions AND INVESTMENT IN GROWTH OPTIMIZATION Management Policy is aimed at complete elimination of routine STRATEGIC DIRECTION flaring and comprises eight key principles, six of which directly KMG is committed to increasing its oil reserves and plans 1 2 address climate change. to ensure reserves growth through organic and inorganic growth. At the same time, KMG is focused on maximising the economics IMPLEMENTATION OF BEST MAINTAINING FINANCIAL of its exploration and production activities. PRACTICES IN SUSTAINABILITY STABILITY 3 AND CORPORATE GOVERNANCE 4

STRATEGIC RESULTS • IMPROVED FREE CASH FLOW AND BETTER FOR KMG INVESTMENT RETURNS

• OPTIMISED BUSINESS PROCESS • ETHICS, COMPLIANCE, AND CORPORATE AND ADOPTION OF A NEW OPERATING MODEL CULTURE

• EMBEDDING DIGITAL SOLUTIONS ACROSS • SUSTAINABLE DEVELOPMENT THE VALUE CHAIN AND ENVIRONMENTAL RESPONSIBILITY

STRATEGIC RESULTS FOR SHAREHOLDERS INCREASE IN COMPANY VALUE INCREASE IN SHAREHOLDER DIVIDENDS

28 29 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

2018–2028 DEVELOPMENT STRATEGY

VALUE CREATION FOR SHAREHOLDERS DIGITALISATION AND PROCESS OPTIMISATION IMPLEMENTATION OF BEST PRACTICES IN SUSTAINABILITY MAINTAINING FINANCIAL STABILITY In this area, KMG will mainly focus on its core A strategic priority for KMG includes building a transparent value chain AND CORPORATE GOVERNANCE The Company is committed to prudent capital business, organic growth and improved operations across all subsidiaries, and joint ventures, including through automating KMG is committed to aligning operations with sustainability principles, allocation policy and focuses on maximization across all key segments. end-to-end IT solutions and aligning processes. and economic, environmental and social goals. The Company seeks to be of shareholder return through the cycle. in the top quartile across all ESG metrics and integrated ESG goals within The Company seeks to adhere to conservative KMG plans to boost oil output and maintain In May 2019, at the Meeting of Management Council of Samruk-Kazyna the framework of strategic and medium-term KPIs for executives. financial policy maintaining balanced debt profile production from existing assets while continuing JSC, a decision on the transition from the Transformation Programme and securing a strong liquidity position. to adopt advanced technology and implementing to the Digital Transformation Programme was made, which is a crucial As a major national employer, the Company recognises and meets its digitalisation projects across its fields. KMG also competitive advantage in an innovation-driven world. important social commitments inspired by principles of partnership with its intends to expand its oil and gas resource base employees and trade unions. to ramp up international and domestic supplies Inspired by the Fund’s new vision, KMG has designed its approach of hydrocarbons and oil products. to developing a project portfolio under the Digital Transformation KMG is committed to enhancing business through greater transparency Programme, which provides for phased digitalisation across all business of operations and adherence to high corporate governance standards. To effectively leverage its oil and gas transportation lines. In 2018, the Company approved its new Code of Business Ethics outlining potential and enhance its exports and transit corporate values and defining key principles and rules of business conduct businesses, the Company is committed to optimising The goals of the Digital Transformation Programme include: as well as the requirements of corporate ethics binding on all employees. the use of its oil and gas pipeline networks. 1. Maintain efforts to achieve the Company’s strategic goals The Company intends to continue monitoring the evolution of global The upgrade of the oil transportation network 2. Gain tangible benefits standards to further improve its corporate governance framework while and new trunk gas pipelines have provided 3. Refocus on core operations meeting the interests of all stakeholders. the Company with the necessary transportation 4. Improve operational efficiency capacities to accommodate the rising domestic 5. Implementation of a data-driven approach to managing the Company production and international transit. (Data-Driven Company) 6. Unlock new opportunities through Industry 4.0. The Company has completed the upgrade of Kazakhstan refineries to boost throughput Transition to digital technologies is implemented under a phased and increase the yield of light products. As a result, approach considering existing maturity and digital literacy levels as well KMG has achieved an important strategic goal as the availability of automation systems at facilities. These goals for Kazakhstan by fully meeting the domestic are achieved through initiatives and projects currently implemented demand for oil products. under the Digital Transformation Programme such as Smart Field, Building a Digital General Plan and 3D Model for Kazakhstan Oil Refineries, Adopting The Company carefully selects and prioritizes a Data Management System, Adopting an Information Security System investment projects, considering only highly as part of the Cybershield, Ride Management (Vehicle GPS Monitoring), etc. profitable projects for investments. On 22 January 2020, a kick-off meeting was held, which discussed the development of the KazMunayGas Digitalisation Strategy. KMG is currently working on the vision for the Company’s further digital development focusing on both the approach to selecting digital solutions and on building a new digital corporate culture through changing employee mindsets and behaviours at all levels from top managers at the Corporate Centre to contributors across subsidiaries.

30 31 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KPI SYSTEM KEY PERFORMANCE INDICATORS SUMMARY OF PROJECT IMPLEMENTATION ALIGNED Our KPIs are based on key financial, WITH STRATEGIC PRIORITIES economic and sector targets set out in the Company’s consolidated KPI Unit of measurement 2017 2018 2019 Business Plan and division-level targets. Net income1 KZT bln 443 696 1,197 Investment projects are implemented to advance progress Prioritized portfolio of projects based on their ratings enables The KPIs are cascaded on a top- ROACE2 % 6.9 8.1 11.5 towards KMG’s strategic goals, i.e. to achieve reserves growth, effective allocation of the Company’s set limited financial down basis. Individual KPIs are based increase oil and condensate production, grow gas exports resources, leading to increased competition for investments Debt/EBITDA3 Ratio 4.24 2.50 2.1 on strategic objectives set for a specific to China, and supply the domestic market with oil products in the business segments. leader. KPIs and targets for members and sales gas. of KMG’s Management Board are set In 2019, the Company also launched an initiative to introduce by the Board of Directors. KMG is committed to smart and efficient capital allocation a project management system. The system aims to improve OPERATIONAL KPIS with a focus on priority projects aligned with our strategic goals the quality of planning and implementation of investment and targets for cash flows, debt reduction, and higher returns projects by applying the best practices of project management OIL AND CONDENSATE PRODUCTION, GAS PRODUCTION, MLN M3 on equity to drive shareholder value growth. from the world’s oil & gas companies. THOUS. TONNES In 2020, it is planned to introduce a unified project 2019 23,618 2019 8,455 TRANSITION TO INVESTMENT AND PROJECT PORTFOLIO management standard for the Company, conduct full-scale MANAGEMENT training for participants of project management and launch 2018 23,606 2018 8,137 Aimed at effectively achieving strategic goals under KMG’s an information system to control and monitor projects. 2017 2017 Development strategy the Company started a transition 23,362 7,992 to portfolio-based investment management in 2019. One tool In general, the objectives of the reorganization of the portfolio-based investment management is project of the investment process in 2019 and for the future are aimed ranking, prioritizing highly efficient strategically important at improving existing processes to increase the maturity OIL TRANSPORTATION, THOUS. TONNES GAS TRANSPORTATION, MLN M3 projects. of the Company in terms of investment management and project management.

2019 78,066 2019 103,494 2018 75,038 2018 111,567 2017 74,815 2017 100,857 INVESTMENT PORTFOLIO OVERVIEW REFINING AND PROCESSING, THOUS. TONNES

2019 KMG’s investment portfolio encompasses development Approximately 40% of KMG’s investment portfolio relates 20,588 projects related to various business segments in the medium to oil and gas exploration and production projects. These 2018 19,715 and long term. As previously, KMG devotes significant resources projects are funded both directly by KMG and in conjunction to the implementation of oil exploration and production with strategic partners on a parity basis. For example, several 2017 18,207 projects. Projects for the development of the oil and gas offshore projects are implemented on the basis of carry transportation infrastructure of Kazakhstan also continue financing (Abay, Isatay, Zhenis, I-P-2, Bekturly Vostochny), to be actively implemented. Completed refinery modernization where capital investments at the exploration stage are borne projects have enabled the production of K4 and K5 quality only by KMG’s strategic partner. In the event of hydrocarbons Our compensation system for executives EMPLOYEE STATUS oil products and increased refining depth. In addition discovery, KMG and its partner finance production and managers focuses on results, to the upstream, midstream and downstream projects, KMG at subsequent stages of the project implementation. motivation, and improving productivity CHAIRMAN EXECUTIVE MANAGER is also interested in implementing social and environmental and operational efficiency and includes OF THE MANAGEMENT (OTHER THAN THE CHAIRMAN projects. KMG holds interests in mega projects Tengiz (20%), OF THE MANAGEMENT BOARD) short-term benefits for achieving KPIs. BOARD Karachaganak (10%) and Kashagan (8.44%).

A specific formula is used to calculate 100 30 70 50 50 Tengizchevroil is implementing two integrated projects each KPI (with adjustments subject UPSTREAM – the Future Growth Project (FGP) and the Wellhead to existing macro indicators). Corporate Pressure Management Project (WPMP). The implementation and functional KPIs are distributed across In the context of KMG’s strategic initiative for Improving of the projects will boost oil production from by 12 the final motivational KPI scorecards Operational Efficiency under the Strategic Goal “Value mln tonnes per year. as follows: creation for shareholders by improving production efficiency and investment in growth”, driving increases in reserves Corporate KPIs and cost-effective production are among the Company’s top 1. Functional KPIs Net Income attributable to the parent company’s priorities. interest. 2. ROACE = (profit for the year + compensation costs adjusted for tax payments)/average capital employed. 3. As per approved methodology of Samruk-Kazyna JSC.

32 33 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

Approximately 40% of KMG’s investment portfolio relates to oil and gas exploration and production projects

At Kashagan field, as sustainable production rates are achieved, two projects are under consideration under Phase 1 to ramp up to plateau production capacity. A FID for the projects is expected in the first half of 2020.

The Karachaganak oil and condensate field is in Phase 2 development (Stage 2M), which includes several major Capex projects, aimed at increasing raw gas treatment and reinjection capacity to extend the duration of the liquid hydrocarbon production plateau at the achieved rates.

32 For more details see the Operating Review section

OIL AND GAS TRANSPORTATION

Oil and gas transportation projects are implemented to advance KMG’s strategic initiative of Improving Operational Efficiency under the Strategic Goal “Value creation for shareholders by improving production efficiency and investment in growth”.

OIL TRANSPORTATION Oil transportation is a strategic segment of KMG’s asset portfolio to maintain access to markets, and a diversified oil transportation system with high transit and export potential has been built.

increasing utilisation rates for existing capacity and ensuring In 2019, the Company completed the remaining works of major and retrofit of the first mechanical wastewater treatment train In 2019, the Company was focused on implementing two major operating cost control. investment projects, including a refinery modernisation in 2019–2021, and the retrofit of the biological wastewater projects: programme in Kazakhstan. Following the completion treatment facility and construction of an advanced treatment • The flow reversal project at the Kenkiyak–Atyrau oil Under the Development of the Amangeldinskaya Group of the extensive upgrade of Kazakhstan’s leading refineries – facility in 2019–2023. pipeline (reversing the flow to carry oil from Atyrau of Deposits project, progress was made on the Barkhannaya- Atyrau, Pavlodar, and Shymkent refineries – the throughput to Kenkiyak and beyond), which started in 2018. The project Sultankuduk exploration cluster, with the seismic programme capacity and refining depths were increased, oil product quality For more details see the Environmental responsibility and safety section is aimed at supporting oil supplies from West Kazakhstan scheduled for the next two years. was elevated to meet the K-4 and K-5 (equivalent to Euro- to Kazakhstan oil refineries, and bolstering exports to China. 4 and Euro-5) standards, and oil products were exported The start of oil flow reversal is scheduled for 2020. The construction of the Beineu–Bozoi–Shymkent gas pipeline for the first time. • A project to remove bottlenecks in the Caspian Pipeline continued. The project, whose timeframe spans 2011–2021, SERVICE PROJECTS Consortium’s oil pipeline system, approved by shareholders is to transport up to 15 bln m³ of gas per year from the western Under the framework of the Kazakh-Romanian Fund in July 2019. The project aims to increase the capacity fields of Kazakhstan, supply gas to the southern regions KMG International N.V. 25 filling stations (Stage 1) KMG’s service projects are not capital heavy, offer quick returns, of the Kazakhstan section within the Tengiz–Astrakhan– of Kazakhstan, and diversify gas exports. The Beineu– are under construction in Romania aimed at developing a retail and are mainly focused on enhancing oilfield services provided Novorossiysk pipeline to 72.5 mln tonnes per year, Bozoi–Shymkent gas pipeline is the largest pipeline project network for the sale of petroleum products. to major oil and gas assets. with a view to expected higher oil production from Tengiz in Kazakhstan’s post-Soviet history and has an important role and Kashagan. The project is expected to be implemented to play in improving the energy security of the nation. For more details see the Downstream section For more details see the Service projects section in 2019-2023. Pavlodar Refinery is making progress on its Yertis project, which will allow for the production of winter diesel fuels with a cloud GAS TRANSPORTATION AND MARKETING OIL REFINING point of –32°C or lower. The Company has successfully completed the construction of the gas transportation infrastructure to support domestic Oil refining projects are implemented to advance KMG’s Reaffirming its commitment to best practices in health, safety, and export gas sales, and the medium-term challenges include strategic initiative of Improving Operational Efficiency and environment management (HSE), in 2019 Atyrau Refinery under the Strategic Goal “Value creation for shareholders started designing and constructing new treatment facilities by improving production efficiency and investment in growth”. for its site as part of the Tazalyk project. Modernization For more details see the Oil Transportation section of treatment facilities is planned in two stages: upgrade

34 35 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

TRANSFORMATION AND DIGITALISATION

In 2019, taking into account the growing role of digital JSC» in the upstream segment. Under the project, the Company System, and Travel Management. The applied systematic of the Smart Field Programme, which will determine the unified technologies in the modern world, Samruk-Kazyna JSC automated MRM processes: an operational and strategic approach to the formation of the DTP Portfolio stimulates approaches for the selection, design and implementation announced the transition to digital transformation for all management tool was implemented through the planning business units to initiate new projects that provide real benefits. of processes and technologies under the Smart Field project portfolio companies. The new approach to the implementation of schedule for planned production repairs of equipment at KMG. of the Digital Transformation Programme is based on principles, on an annual and monthly basis, as well as the prioritized The development of KMG Digitalisation Strategy including simplicity, clarity, and the presence of real benefits. implementation of critical work. KMG introduced a mechanism is planned for 2020. The document will determine priorities On the ERP side, in line with the new approach, ERP will for generating operational and analytical reports based on data for the implementation of digital technologies in KMG Group transform to the Programme of projects, under which instead Given the new vision of the Fund, KMG implemented on planning and control of maintenance costs and costs reflecting its value chain. It also will identify opportunities of a single installation for all subsidiaries and affiliates, measures to update the portfolio of the Digital Transformation to repair oilfield equipment. and evaluate the potential effect of digitalization and indicate the implementation of the ERP system based on the S4/HANA Programme (hereinafter - DTP). The following key criteria the focus within business segments and projects. product will be carried out through standardization of business are used to select the projects: In the downstream segment, KMG completed the project processes of divisions (master plans) and testing at pilot • Comprehensive change of people, business processes “Implementation of Production Planning Optimization Under the development of the Digitalisation Strategy, an initial subsidiaries. and technologies; at KMG Refineries” based on the software “Spiral”. It resulted assessment of digital state at KMG will be carried out. • The scale of change; in high accuracy of planning, aligned an interaction between With joint efforts with the business units, KMG transformation During 2019, KMG prepared a solid foundation • Real economic effect/support strategic KPI. the structural divisions of plants and its head office during and digitalisation unit will start developing and detailing for the implementation of Digital Transformation, increased the business planning process, and ensured transparency initiatives which will be integrated into the Roadmap the involvement of project sponsors, and ensured the continued On 4 September 2019, KMG’s Board of Directors approved of planning. The planning process is managed at the corporate and focused on digitalizing critical business processes. efficient implementation of key transformational initiatives. the Roadmap of the Digital Transformation Programme centre level. Given the introduction of production planning for 2019-2024. At year-end 2019, the KMG DTP portfolio included optimization, KMG already recoded the improved yield of oil Under the Strategy implementation, each KMG subsidiary 14 projects and 14 measures within 8 initiatives: products. This is expected to contribute to cost reductions will develop its digital technology implementation 1. Ensuring industrial safety; and better competitiveness of refineries. programme. At the corporate centre level, digitalisation will 2. High-performance culture; focus on the implementation of “end-to-end”, “integration”, 3. Reengineering of production and corporate business Another project in the downstream segment is Transition and system-methodological projects. processes; of refineries in the Republic of Kazakhstan to a 3-year 4. The new Procurement model in the Fund’s Group; overhaul period (including maintenance and equipment In line with the new approaches, KMG plans to continue 5. Increased operational efficiency through data analysis; repair management system). It created conditions to increase the implementation of two major initiatives of Digital 6. Implementation of Cybershield project in the Fund’s Group; the volume of oil refining, reduce repair costs, reduce the risk Transformation - Smart Field, and Transformation of the main 7. Digital Business Solutions; of emergencies, as well as allow shutdowns of refineries business functions of ERP (ERP). 8. Improving the efficiency of IT. for repairs not in every year, but every three years. The purpose of the Smart Field Programme is to build a system In 2019, 3 projects and 2 measures under the Digital In 2019, three new projects were added to the Digital for managing the field development process and production Transformation Programme were implemented. This includes Transformation Portfolio: Implementation of the Lean 6 Sigma control to maximize the economic efficiency of field the “Implementation of a new model for maintenance programme in the Oil and Gas Production business segment, and increase the life cycle of oil reservoir. At present, KMG and repair management (MRM) project at Mangistaumunaigas Implementation of an Information Security Management develops the Development Concept for the implementation

36 37 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

OPERATING REVIEW

RESERVES NET RESERVES2 UNDER PRMS (NET TO KMG), YE2019

2P RESERVES BREAKDOWN BY ASSET 2P RESERVES BREAKDOWN BY HYDROCARBON TYPE Reserves Oil and condensate, NGL, Commercial gas, Hydrocarbon (NET TO KMG), % (2019YE) (NET TO KMG), % (2019YE) mln barrels mln barrels2 bcf reserves, mmboe Proved (1P) 2,825 168 5,204 3,860 12 20 1 179 877 Proved plus Probable (2P) 3,993 189 6,228 5,220 4 Mega assets1 179 877 Proved plus Probable plus 4,686 224 7,070 6,089 6 OMG Possible (3P) MMG 4 Sales gas EMG 6 NGL Urikhtau Operating Oil & condensate Reserves Oil and condensate, NGL, Commercial gas, Hydrocarbon Others mln tonnes mln tonnes2 bcm reserves, mmtoe Proved (1P) 371 14 147 499 13 59 Proved plus Probable (2P) 524 16 176 676 76 Proved plus Probable plus 616 19 200 790 Reaffirming its commitment to transparency, KMG, for the first The proved reserves (1P) life of oil and condensate is 16 years Possible (3P) time ever, disclosed a summary of its reserves report prepared (based on 2019 production level), far exceeding the average 6,000 cf = 1 boe; 1 cm = 35.31466 cf; 1 ton ~ 7.62 barrels. under the internationally used PRMS guidelines. According for the global oil majors (about 12 years). to the reserves audit by the international independent consulting firm DeGolyer & MacNaughton, KMG’s proved plus 1. Net Reserves are defined as that portion of the gross reserves attributable to (1) the interest held by KMG after deducting all interests held by others, as well as (2) probable hydrocarbon (2P) reserves were at 676 mln tonnes interests that are not held by KMG, but which KMG controls. 2. 23 years Natural gas liquids. of oil equivalent (5,220 mmboe) as of 31 December 2019. 2P reserve life ratio of oil and condensate at 2019 production level

38 39 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

EXPLORATION

STRATEGIC OBJECTIVES IN ENSURING GROWTH IN RESERVES

Organic growth Inorganic growth KMG is conducting comprehensive studies of Kazakhstan’s the largest high-resolution seismic survey project in the modern sedimentary basins to assess their oil and gas potential history of our nation. • Carry out exploration at current contract areas using own • Consider acquiring oil and gas assets in Kazakhstan (the and build a portfolio of promising blocks for subsoil use. In 2019, funds and carry financing coastal area (~90% of Kazakhstan’s total we completed the models of the Ustyurt-Bozashin sedimentary Exploration drilling programmes were also completed • Carry out further exploration at operating assets using reserves) has a huge potential for notable discoveries) basin’s petroleum system and the Pre-Caspian sedimentary in the Urikhtau and Bekturly East areas, which resulted the Company’s own funds • Attract strategic partners for joint exploration basin flanks (North, East and South), along with the tectonic- in the identification of the Jurassic, Triassic and Permian- and development of new fields under carry financing sedimentary model of the South Turgay sedimentary basin. Carboniferous oil and gas prospects. Test programmes have arrangements, specifically, with a focus on deep Paleozoic been scheduled for 2020. deposits and offshore fields A portfolio of five new promising subsoil use projects was built, including 15 projects for inclusion in the National Acreage Exploration costs totalled KZT 53 bln (excluding shares) in 2019. Management Programme and five projects for state geological surveys in accordance with Kazakhstan’s Subsoil and Subsoil Use Code. KMG’s portfolio consists primarily of mature fields, which Additions to oil reserves are expected to be driven through prioritises exploration as part of the long-term strategy both organic and inorganic growth. Growth in KMG’s reserves In addition, the Company carried out extensive seismic to maintain stable production levels. This requires will rely on the implementation of exploration projects field surveys over promising areas within the Pre-Caspian, Exploration 2017 2018 2019 a focus on execution and operational excellence, the search onshore and within the Kazakhstan sector of the Caspian Sea, Mangyshlak and South Turgay sedimentary basins, 2D seismic, linear km - 1,000 240 for resource replenishment solutions and unlocking new and going forward, with further exploration in licenses operated and over offshore areas of the Caspian Sea. One of the year’s reserves and bringing them online both at new and mature by our subsidiaries. In 2019, KMG’s portfolio comprised highlights was the completion of seismic field surveys 3D seismic, sq. km. 4,299 1,253 6,928 fields, based on the results of further exploration activities. 16 exploration projects, of which 8 were offshore and 8 over the Taisoigan area, acquiring a total of 5,600 sq. km of data, Number of wells drilled 50 54 39 onshore.

40 41 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

SIGNIFICANT EXPLORATION OPPORTUNITIES

UOG Urikhtau Uralsk Taysoigan Atyrau region

Liman

Zhambyl Abay Karaton-Sarkamys Isatay Kurmangazy Ustyurt Kalamkas-Khazar

Khvalynskoye Mangistau region Bekturly I-R-2 East OMG Exploration projects for 2020-24

Projects with pending Tsentrainoye E&P licenses

Zhenis

TECHNICAL COOPERATION WITH INTERNATIONAL PLAYERS EXPANSION OF PARTNERSHIP PROJECTS

During the year KMG continued to expand its cooperation Given the recent amendments to the national tax and subsoil in exploration with international oil and gas companies: use laws aimed at stimulating new exploration, in 2019 KMG Joint evaluation Knowledge • On 11 February 2019, to facilitate participation in drilling focused on attracting strategic partners to new subsoil use of exploration assets and technology sharing projects within the Azerbaijan sector of the Caspian Sea, projects. we gave the go-ahead for a KZT 21.6 bln (USD 57 mln) capex • On 1 April 2019, the Ministry of Energy of the Republic project to upgrade our jack-up drilling rig. To implement of Kazakhstan, KMG and PJSC LUKOIL (LUKOIL) the project, KMG Drilling&Services and Caspian Drilling signed a contract for the exploration and production Company signed a trusteeship agreement to transfer of hydrocarbons at the Zhenis block, located the Satti jack-up drilling rig to Caspian Drilling Company in the Kazakhstan sector of the Caspian Sea. According for modification and further operation on subsoil use to a joint estimate by KMG and LUKOIL, the block’s projected projects within the Azerbaijan sector of the Caspian Sea. recoverable resources (C3) are 65.1 mln tonnes. The project The rig modification project is currently in progress, operator is Zhenis Operating LLP (a 50/50 joint venture with the trustee currently in talks with BP Azerbaijan between KMG and LUKOIL). on the terms of a drilling contract to use the Satti rig • On 7 June 2019, KMG and LUKOIL signed the heads Regional study Multiple MOUs signed at the Shallow Water Absheron Peninsula project. of agreement for the I-P-2 project covering the block of sedimentary basins of the same name located in the Kazakhstan sector 47 For more details see the Service projects section of the Caspian Sea. According to a preliminary estimate by LUKOIL, the block’s projected recoverable resources (C1) • On 17 May 2019, KMG and British Petroleum (BP) signed are 15.1 mln tonnes. Both companies plan to sign a contract a memorandum of understanding to jointly review with Kazakhstan’s Energy Ministry for the exploration the available technical data and existing assets of KMG and production of hydrocarbons at the 1-P-2 block in 2020. 2019 and third parties. • On 26 July 2019, the Ministry of Energy of the Republic • On 20 September 2019, KMG and LUKOIL signed of Kazakhstan, KMG and Eni S.p.A. (Eni) signed a contract an agreement on the joint study of areas within the territory for hydrocarbon exploration at the Abay block, located April 2019 (Zhenis) July 2019 (Abay) of the Republic of Kazakhstan. in the Kazakhstan sector of the Caspian Sea. The project New E&P • On 24 September 2019, KMG and Equinor signed a joint operator is Isatai Operating Company LLP (a 50/50 joint rights study agreement providing for geological and geophysical venture between KMG and Eni). studies to assess the hydrocarbon potential of oil and gas areas in Kazakhstan. April 2019 September 2019 September 2019 Other agreements

42 43 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

PRIORITY AREAS:

Enhancing the innovation Removing onshore and technology base infrastructure constraints of production, including by addressing gas smart field projects at assets and water utilisation issues under development

Wider adoption of polymer Increasing oil recovery flooding rates at producing assets

Enhancing waterflood Commissioning further management exploration facilities at KMG-operated producing assets

PRODUCTION

OIL AND CONDENSATE PRODUCTION BY ASSET (NET TO KMG), KBOPD1 Offsetting natural decline in production rates OPERATING ASSETS KMG interest OIL PRODUCTION 484 485 1 479 JSC Ozenmunaigas 100% 463 125 130 KMG implements a range of measures across its operating In 2019, KMG’s oil and condensate production remained stable 125 assets to enhance operational efficiency and process JSC Embamunaigas 100% at 23.6 mln tonnes, or 485 kbopd, almost flat year-on-year. 120 discipline, release trapped reserves in order to maximise well JSC Mangistaumunaigaz 50% We reaffirmed our status as the national oil and gas leader productivity and improve the technology and economics of well JSC Karazhanbasmunai 50% with our share of total oil and condensate production at 26% interventions. in 2019. JV Kazgermunai LLP 50% 24 Oil and gas are produced at KMG’s operating assets, as well JSC PetroKazakhstan Inc. 33% Our consistently high level of oil and condensate output 23 24 22 2 15 24 as from mega projects where KMG has non-operating interests. Kazakhturkmunay LLP 100% is supported by increased production from mega projects 25 and effective management of KMG-operated producing assets. 110 109 109 Kazakhoil Aktobe LLP 50% KMG participates in all major oil and condensate production KMG maintains a well-balanced asset portfolio with significant 111 projects in Kazakhstan: it has interests of 20%, 10% and 8.44% Amangeldy Gas LLP 100% growth potential. The share of operating and mega projects (condensate) in Tengiz, Karachaganak and Kashagan, respectively. in total oil and condensate production was 65.5% (15.5 mln MEGA PROJECTS (NON-OPERATED KMG interest tonnes) and 34.5% (8.1 mln tonnes), respectively. For oil production mega projects, KMG has partnered ASSETS) 56 57 58 Tengiz with a number of global majors: Chevron Corp, Exxon Tengiz (Tengizchevroil LLP) 20% 58 Karachaganak Mobil Corp, PLC, Eni SpA, TOTAL SA, Kashagan Kashagan (North Caspian 8.44% Inpex Corp, China National Petroleum Corp (CNPC), Operating Company N.V.)2 19 20 20 Ozenmunaigas + KazGPZ and PJSC LUKOIL. 20 Embamunaigas 30 28 27 Karachaganak (Karachaganak 10% 23 Karazhanbasmunai Petroleum Operating B.V.) Kazgermunai 26 23 21 18 PetroKazakhstan Inc. 62 63 63 63 Mangistaumunaigaz Kazakhoil Aktobe 1. Kazakhturkmunay Also includes KazGPZ LLP (condensate). 7 6 7 2. 1. 8 KMG has a 50% interest in KMG Kashagan B.V., which in turn holds a 16.88% 485 kbopd Assuming individual bbl/tonne conversion rates used for each asset. 6 8 7 8 interest in the Kashagan mega project. oil and condensate production level 2016 2017 2018 2019

44 45 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

MEGA PROJECTS

World class projects developed in partnership with leading global integrateds.

TENGIZ

Highlights:

OIL PRODUCTION (TOTAL) OIL PRODUCTION (NET TO KMG) DEVELOPMENT PERSPECTIVE 2P OIL RESERVES LIFE ASSOCIATED GAS PRODUCTION INTERESTS, % (TOTAL)1 The implementation of FGP-WPMP Over 20% KMG will boost oil production from Tengiz 50% Chevron 25% Exxon Mobil 29,791 5,958 years ths tonnes ths tonnes 20 5% LUKARCO B.V. (LUKOIL) by mln tonnes per year 16.3 (651 kbopd) (130 kbopd) 12 bln m³ OPERATORSHIP • Tengizchevroil LLP

The premier asset of Kazakhstan’s Oil & Gas industry. Tengizchevroil is focused on the exploration, production, Wellhead Pressure Management Project (WPMP) risk prevention measures, evaluate vast numbers of future Tengiz ranks as the world’s deepest producing super giant and sales of hydrocarbons from the Tengiz and Korolevskoye As part of the WPMP project, a new gathering system, pressure on-site activities and reduce production losses. oil field and the largest single-trap producing reservoir fields in the Atyrau Region. boost facilities, infrastructure and ancillary facilities are being • The Minimum Viable Product (MVP) definition project in existence. constructed to maintain the current oil production rates enabled comprehensive integration of Tengizchevroil KMG share in Tengiz’s oil production increased by 4.1% for the existing KTL and SGP. Commissioning is scheduled business situation assessment workflow, leading to faster Tengizchevroil LLP (Tengizchevroil) operates a license that to 5,958 ths tonnes (130 kbopd) while gas production grew for the end of 2022. decision making and maximising asset value. The MVP includes the unique, supergiant Tengiz field and the adjacent, 4.2% to 3,258 mln m³ driven by stable operation and improved combines rig schedules, well start-up schedules, production smaller but still significant, Korolevskoye field. The Tengiz reliability of KTL, SGI/SGP facilities despite production Digital projects to transform operations forecasts and solution analysis for the quick economic oil field was discovered in 1979, and it is the world’s deepest stoppages for overhauls. From 1 August to 9 September 2019, In 2019, Tengizchevroil embarked on a digital transformation, evaluation of development scenarios. supergiant oil field. Tengiz carried out a scheduled 40-day overhaul at KTL 1. developing digital solutions to improve safety, better manage • Real Data Optimisation Programme. Supported risk, improve operating process efficiency and increase revenue. by the programme, the FGP and Core Operations teams Currently, oil production and processing are carried Outlook for Tengiz • A pilot programme to monitor safety compliance has have developed more than 1,300 observation and analysis out at modern, highly reliable production facilities: KTL Tengizchevroil is implementing two integrated projects – improved employee safety in the field, operating and office screens for real-time data visualisation, with data feeds (throughput: 14.2 mln tonnes of processed oil in 2019), the Future Growth Project (FGP) and the Wellhead Pressure environments at the Tengiz field. The programme involved from over 3,000 sensors covering all facilities and the newly Second-Generation Plant (SGP, throughput: 15.6 mln tonnes Management Project (WPMP). The two projects will make approximately 350 wireless sensors, boosting personal launched “Basic” substation. of processed oil in 2019), and Sour Gas Injection (SGI, 3.65 bln a significant contribution to the national economy: the FGP- safety levels through increased situational awareness. • The Automated Process Control (APC) system uses various m³ in 2019). At the beginning of 2020, the well stock comprised WPMP has already created about 48 thous. jobs in Kazakhstan, • The project on the visualisation and analysis of concurrent digital methods such as data mining and simulation 156 production wells and 8 gas injection wells. with about 1,000 more permanent jobs to be added to support activity has enabled consolidated views of core activities to develop a specific set of process settings for existing sites the operation of the FGP-WPMP. The implementation and activities under the FGP to drive parallel planning. Timely in real time. The agreement for the Tengizchevroil LLP project was of the FGP-WPMP will boost oil production from the Tengiz field identification of potential conflicts enables teams to monitor signed on 2 April 1993 between the Republic of Kazakhstan by 12 mln tonnes per year. and Chevron Corp. A 40-year hydrocarbon exploration and production license was granted to Tengizchevroil in 1993. The updated FGP-WPMP budget, given a cost increase from USD TENGIZCHEVROIL’S OPERATIONAL HIGHLIGHTS 36.8 bln to USD 46.5 bln (including a contingency reserve of USD 1.3 bln), was pending for approval by TCO Partners. TENGIZCHEVROIL’S PRODUCT SALES TCO partners approved a cost increase of USD 45.2 bln in total Oil production, Associated gas Dry gas Liquefied Sulphur Gas injection, 3 under the FGP-WPMP (without approving a USD 1.3 bln thous. tonnes production, production, petroleum gas production, mln m 3 3 contingency reserve). mln m mln m (LPG) production, thous. tonnes 2017 2018 2019 thous. tonnes Oil, thous. tonnes 28,753 28,800 30,155 Future Growth Project (FGP) 2017 28,697 15,860 9,237 1,382 2,566 3,097 The FGP includes the construction of a 12 mln tonnes per Dry gas, mln m3 7,447 7,532 7,941 28,622 15,625 9,186 1,343 2,574 3,186 year oil preparation plant (Third-Generation Plant, 3GP), 2018 LPG, thous. tonnes 1,377 1,345 1,332 and Third Generation Gas Injection (3GI) with an annual 2019 29,791 16,290 9,471 1,348 2,589 3,655 Sulfur, thous. tonnes 2,489 2,467 2,585 capacity of 9.4 bln m³, and well sites, along with well drilling. Commissioning of the 3GI and 3GP facilities is scheduled

1. for 2023. 1. Includes gas concumed in operations and gas reinjection.

46 47 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KASHAGAN

Highlights:

OIL AND CONDENSATE OIL AND CONDENSATE 2P OIL AND CONDENSATE NATURAL GAS DEVELOPMENT PERSPECTIVE INTERESTS, % OPERATORSHIP PRODUCTION (TOTAL) PRODUCTION (NET RESERVES LIFE PRODUCTION (TOTAL) TO KMG) Subject to final investment decisions (FIDs) 16.88% KMG • North Caspian Over for investment projects, oil production Kashagan B.V. Operating 16.81% Eni from Kashagan has the potential to reach Company N.V. 14.1 8.5 16.81% ExxonMobil 120 years 16.81% Shell mln tonnes 1,169 bln m³ 16.81% TOTAL SA (307 kbopd) ths tonnes 450 kbopd over the 8.33% CNPC (25 kbopd) medium-term 7.56% INPEX North Caspian Sea

The giant Kashagan field is the largest discovery in the last production islands EPC2, EPC3 and EPC4. A total of 40 wells Oil production from the North Caspian project was Bundle 1 four decades and one of the most complex offshore were drilled on the Kashagan field, 6 of which are injection wells 14.1 mln tonnes (307 kbopd) in 2019. Production from Kashagan deposits globally. and 34 production wells. peaked at around 400 kbopd in 2019, while the average To further ramp up oil production, KMG is considering increased daily production was 344 kbopd in Q4 2019. Associated gas raw gas reinjection and redistribution of gas to other islands The North Caspian project is the first major offshore oil The Production Sharing Agreement in respect of the North production was 8.4 bln m³. through: and gas project in Kazakhstan. It includes five fields: Kashagan, Caspian Sea (NCPSA) was signed by the Republic of Kazakhstan • upgrades to the interior parts of the two existing Kalamkas-Sea, Kairan, Aktoty, and Kashagan South-West and an international consortium in November 1997. KMG’s share of oil production from the Kashagan field increased compressors on Island D to increase their capacity fields. The areas of the Kalamkas-Sea and Kashagan South- The operator is North Caspian Operating Company N.V. (NCOC), by 6.9% to 1,169 thous. tonnes of oil (25 kbopd) while associated • laying an ultra-high pressure pipeline to shift gas injection West fields are in the process of being returned to the Republic acting on behalf of the contractors. gas production grew by 10.4% to 700 mln m³. from Island D to Islands EPC2 and EPC3 of Kazakhstan. • conversion of three wells on EPC islands to injection. Currently, KMG has a 50% interest in KMG Kashagan B.V., which Under the PSA terms, all oil produced from the Kashagan field The giant Kashagan field is the largest oil discovery in the last in turn holds a 16.88% interest in the Kashagan mega project. is exported, including KMG’s entitlement share of production. Commissioning of the project, subject to a positive FID, four decades. The estimated 2P oil and condensate reserves life The remaining 50% interest, or 8.44% in the project, is owned The key export destination is the port of Novorossiysk, to which is scheduled for 2022. is over 120 years at the 2019 production level. by Samruk-Kazyna JSC. According to the terms of the addendum the oil supplies are pumped via the CPC pipeline. KazTransGas to the Option Agreement between Cooperative JSC is the sole buyer of gas from all contractors at the Kashagan Raw gas supply to third party project The Kashagan field lies in an offshore location 80 km KazMunayGas U.A.1 and Samruk-Kazyna JSC, the option period field, with whom a single gas purchase and sale contract has from Atyrau at water depths of 3 m to 4 m. The field reservoir for buying back a 8.44% interest in KMG Kashagan B.V. has been been signed. North Caspian Operating Company N.V. and KazTransGas JSC lies at a depth of over 4 km and is characterised by high extended from 2018–2020 to 2020–2022. are exploring raw gas supply to KazTransGas’ planned gas Outlook for Kashagan pressures (over 700 bar) and high hydrogen sulphide (H2S) processing plant with an annual throughput of 1 bln m³ of raw content. At the same time, sour gas reinjection at high pressures Once sustainable production rates are achieved, two gas per year. NCOC’s operational highlights enables enhanced oil recovery. projects are under consideration in Phase 1 to ramp up Oil Associated gas Sulphur Gas to plateau production capacity with the potential to grow oil Social and environmental responsibility Kashagan is one of the most challenging industry projects production, production, production, injection, and condensate production to 450 kbopd in the medium term. globally due to harsh environmental conditions at sea thous. mln m3 thous. mln m3 – Bundle 1 Under the North Caspian Sea Production Sharing Agreement, and significant design, logistics and safety challenges. Located tonnes tonnes – Raw gas supply to third party project North Caspian Operating Company N.V. allocates funds in the subarctic climate, the North Caspian Sea is covered 2017 8,286 4,799 1,151 321 annually to infrastructure and social projects in the Mangistau with ice for about five months a year, requiring innovative and Atyrau Regions. The company allocated USD 75 mln 2018 13,219 7,697 1,340 2,235 technical solutions. KMG, together with international partners, An FID for the projects is expected in the first half of 2020. for such projects in 2019, with 11 projects successfully is successfully implementing the project, having achieved 2019 14,127 8,453 1,323 3,148 completed – 7 in Atyrau Region and 4 in Mangistau Region. sustainable production rates with further growth potential.

The Kashagan field construction design comprises onshore In 2019, for the first time in Kashagan’s history, an overhaul and offshore facilities. Onshore facilities include the Bolashak was successfully completed with a total shutdown of all Onshore Processing Facility while the offshore facilities production facilities. The repairs enabled increases in oil comprise a range of artificial structures including an operational and gas production from onshore and offshore facilities, as well and processing complex on Island D, Island A, and early as improving the utilisation rate to 98.4%.

1. 100% subsidiary of KMG, with the direct ownership of 99.7440256% and indirect ownership via KMG Kumkol LLP of 0.2559744%.

48 49 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KARACHAGANAK

Highlights:

PRODUCTION OF LIQUID LIQUID HYDROCARBON DEVELOPMENT PERSPECTIVE GAS PRODUCTION 2P OIL AND CONDENSATE INTERESTS, % OPERATOR HYDROCARBONS (STAB.1) PRODUCTION (STAB.) (TOTAL) RESERVES LIFE (TOTAL) (NET TO KMG) The implementation • Royal Dutch Shell and Eni are the joint 10% KMG of investment projects 29.25% ENI operators of the to maintain the achieved 18.6 Over 29.25% Shell (Karachaganak Petroleum Operating B.V.) liquid hydrocarbon bln m³ 18.00% Chevron

10.1 1,015 production plateau levels years 13.5% LUKOIL mln tonnes, mln tonnes 20 (219 kbopd) (22 kbopd)

One of the world’s largest gas and condensate fields at high pressure and feeds liquid hydrocarbons to the KPC KARACHAGANAK PETROLEUM OPERATING B.V.’S OPERATIONAL HIGHLIGHTS KARACHAGANAK PETROLEUM OPERATING B.V.’S PRODUCT SALES for stabilisation before shipment for export. Karachaganak oil and condensate field is one of the largest Oil, thous. tonnes 3 oil and condensate fields in the world, located in the West Core production processes: Gas production, mln m Kazakhstan Region and covering an area of over 280 sq. km. • Treatment (dehydration) of sour gas for reinjection 2019 10,160 2019 18,615 The field was discovered in 1979, with pilot development started • Reinjection of sour gas 2018 10,365 in 1984. • Transport of unstable condensate to the KPC 2018 18,913 • Wastewater treatment and disposal 2017 10,715 2017 18,924 The Karachaganak project is developed under the Final Production Sharing Agreement (FPSA) signed on 18 November Unit 3 – a gas treatment unit located in the northeastern part 1997 for a period of 40 years. Equity interests in the project of the field, which separates and partially stabilises liquid Liquid hydrocarbon production, thous. tonnes Unstable condensate, thous. tonnes are as follows: Royal Dutch Shell (29.25%), Eni (29.25%), hydrocarbons and gas before shipment for export. 10 Chevron (18%), LUKOIL (13.5%), and KMG (10%). Royal Dutch 2019 10,147 2019 Shell and Eni are the joint operators of the Karachaganak Core production processes: 10,953 2018 615 project. • Treatment of gas for further export to Orenburg Processing 2018 11,247 657 Plant 2017 2017 The Karachaganak project has three core process facilities, • Condensate degassing prior to further stabilisation comprising a single system of interrelated and interdependent at the KPC 3 process units within the Karachaganak field’s production • Wastewater treatment and disposal Gas injection, mln m3 Commercial gas, mln m process: 8,711 2019 9,113 At the beginning of 2020, the operating well stock of the field 2019 KPC – the Karachaganak Processing Complex, located included 156 producing wells and 18 injection wells. 2018 8,589 2018 9,493 in the northwestern part of the field and processing liquid 9,289 8,782 hydrocarbons coming from wells as well as feedstock Liquid hydrocarbon production from Karachaganak decreased 2017 2017 transported from Unit 2 with sour gas reinjection systems (Unit by 7.3% to 1,015 ths tonnes (22 kbopd) in terms of KMG’s share. 2). Gas production was 1,861 mln m³, down 1.6% year-on-year. The decrease in production was due to the complete shutdown Core production processes: of production facilities at the KPC, as well as Unit 2 and Unit 3 Production Plateau Extension Projects (Stage 2M): • Stabilisation of crude oil (sulphur and mercaptan removal) from 16 September to 10 October 2019 for scheduled preventive plateau by increasing annual gas injection volumes for further export via the CPC pipeline system maintenance, which was the largest in Karachaganak Petroleum • Installation of the additional 5th Trunk Line Project – from 10 bln m³ to 13 bln m³ per year. • Treatment (dehydration) of sour gas for reinjection Operating B.V.’s history. the project will increase the annual volumeof gas injection and export to the Orenburg Gas Processing Plant (OGPP) to 10 bln m³ in order to maintain reservoir pressure. In 2019, the 5th Trunk Line project was commissioned. • Production of treated fuel gas for own production needs Outlook for Karachaganak • KPC Gas Debottlenecking Project (KGDBN) – the project In May 2019, the Consortium Partners signed an agreement of the field, for the production needs of Karachaganak The Karachaganak oil and condensate field is in Phase 2 envisages commissioning of new glycol gas-dehydration sanctioning the Fourth Injection Compressor Project (4IC). Petroleum Operating B.V., and for the needs of the West commercial development (Stage 2M), which includes a number and low-temperature gas separation units with a total Kazakhstan Region of major capex projects (Production Plateau Extension Projects capacity of 4.0 bln m³ per year to increase the volume The successful timely commissioning of the 5th Trunk Line • Wastewater treatment and disposal and the Karachaganak Expansion Project) aimed at increasing of gas treatment for reinjection and/or export to Orenburg project provides confidence that Karachaganak Petroleum raw gas treatment and reinjection capacity to extend Processing Plant. Operating B.V. will be able to successfully meet the expectations Unit 2 – a gas treatment unit located in the southeastern the duration of the liquid hydrocarbon production plateau • Installation of Unit 2 Fourth Injection Compressor Project and deliver other major CAPEX projects currently part of the field, which separates and reinjects sour gas at the achieved rates. (4IC) – laying a network of process pipelines to maintain under construction: the KPC Gas Debottlenecking Project reservoir pressure and the liquid hydrocarbon production

1. A conversion factor of 0.9 is applied to total oil and condensate production to estimate stable liquid hydrocarbons.

50 51 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

(KGDBN) and the Unit 2 Fourth Injection Compressor Project OIL PRODUCTION AT OPERATING ASSETS Produced oil profiles vary widely from region to region. A total of 16,564 wells were in operation in 2019, of which (4IC). Commissioning of these projects is scheduled for 2021. The heaviest oil is produced at Karazhanbasmunai, 12,235 were classified as the current declining well stock, which At operating assets developed by KMG independently with a conversion factor of 6.68 bbl per tonne. Crude oil accounts for the bulk of oil and condensate production. Combined, the production plateau extension projects will or with partners, more than half of the fields are mature given produced at large non-operated projects is lighter, with its maximise the benefits through: the high reserve depletion rates and increased water cuts (over conversion factor close to 8 bbl per tonne. • increased gas treatment capacity 80%). Commercial development of our mature fields started • incremental liquid hydrocarbon production many decades ago. The first oil discovery in Kazakhstan was • upgrades to existing liquid hydrocarbon treatment units made in 1899 at the Karashungul field, currently operated KMG’S UPSTREAM SEGMENT INDICATORS IN 2019 • reduced rates of pressure declines in the reservoir. by JSC Embamunaigas. This marked the start of oil production in the country. Thus, 2019 marked 120 years of Kazakhstan’s Digital projects to transform operations national oil and gas industry. The first gas gusher was Porosity API gravity Sulphur Number Average Average Oil As part of the Digital Kazakhstan innovative development struck at the Uzen field in 1960, and oil gusher in 1961. content, % of fields flow rate flow rate conversion state programme, Karachaganak Petroleum Operating The Karazhanbas gas and oil field came on stream in 1974, of new of the current factor, bbl/ B.V. has developed a roadmap for a digital transformation when the first oil gusher was struck. wells, declining well tonne and technology innovation. The current workstreams tonnes stock, tonnes are focused on the areas of production optimisation, Importantly, today about 80% of total oil production per day per day well surveillance, smart plant and digital transformations at the Company’s operating assets comes from seven key for project delivery, minimization of paper-intensive processes fields: Uzen and Karamandybas (JSC Ozenmunaigas), Kalamkas JSC Ozenmunaigas (100%) 0.19 36.51 0.14 2 11.2 4.4 7.23 and maximisation of the automated workflows, warehouse and Zhetybai (JSC Mangistaumunaigaz), S. Nurzhanov JSC Embamunaigas (100%) 0.27 32.03 0.62 33 11.1 3.8 7.30 management, improvement of the monitoring and intervention and East Moldabek (JSC Embamunaigas), and Karazhanbas KazGPZ (condensate) (100%) 0.14 57.05 - 4 - 0.8 - activities. (JSC Karazhanbasmunai). JSC Karazhanbasmunai (50%) 0.30 19.81 1.55 1 2.9 2.2 6.68 JV Kazgermunai LLP (50%) 0.26 39.95 0.1 5 21.2 26.0 7.38 Digitizing key field parameters will enable Karachaganak Improving production efficiency at mature fields PetroKazakhstan Inc. (33%) 0.25–27 41.9–66.9 0.03–0.43 23 10.5–17.0 3.53–8.70 7.75 Petroleum Operating B.V. to make timely decisions maximising is an important driver of the Company’s future growth. Amangeldy Gas LLP (condensate) (100%) 0.10–0.24 – 0 3 0.15 1.04 – productivity through automated integrated data analysis tools. To achieve this, our production facilities continuously monitor JSC Mangistaumunaigaz (50%) 0.14 30.77 0.2 15 12.7 6.0 7.23 production processes to further optimise them, comply Kazakhoil Aktobe LLP (50%) 0.10 36.12 1 2 – 17.1 7.50 Social and environmental responsibility with the corporate energy-saving policy, and search for ways Kazakhturkmunay LLP (100%) 0.14 36.12 3.17 6 – 32.9 7.21 In 2019, eight social projects were implemented in the West to increase oil recovery rates, e.g. by commissioning new Kazakhstan Region, of which five were civil construction wells, , well workovers, reperforations, projects (mainly the construction of fitness and recreation and polymer flooding. centres) and three were road construction and repair projects. In 2019, KMG’s share of oil production from operating Next-generation multiphase pumps assets decreased slightly to 15,476 thous. tonnes (307 and the Megaflow separator technology are just a few kbopd). This reflects a natural decline in production levels examples of the technology-driven evolution of well treatment at the Kazgermunai and PetroKazakhstan Inc. fields by 17.7% and testing at the Karachaganak field across all three year-on-year and 15.5% year-on-year, respectively, which phases (gas, oil, and water). This allowed the separated is in line with the planned production decline. hydrocarbons to be sent directly to the plant without flaring. The deployment of advanced technology and continuous improvement has enabled Karachaganak Petroleum Operating NUMBER OF WELLS AT KMG-OPERATED ASSETS, UNITS B.V. to dramatically reduce its emissions, achieving a world- class gas utilisation rate of 99.94% for Karachaganak. In 2019, 581 total gas flaring was just 0.056% (10.4 mln m³) of the total 2019 12,235 3,748 16,564 604 gas produced by Karachaganak Petroleum Operating B.V. 2018 11,667 3,495 15,766 (18,614.6 mln m³). 541 2017 11,796 3,654 15,991

New wells Current declining well stock, including idle wells Injection wells

52 53 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

GAS PRODUCTION COMMERCIAL GAS PRODUCTION BY MEGA PROJECTS (NET TO KMG), MLN M3 NATURAL GAS PRODUCTION BY ASSET, MLN M3 2017 2018 2019 Natural and associated gas production increased by 3.9% 8,455 to 8,455 mln m³ (55.8 mmboe) in 2019. Operating assets Tengiz (Tengizchevroil LLP) 1,847 1,837 1,894 8,137 3,258 7,992 produced 2,636 mln m³ (31% of the total), and 5,819 Karachaganak (Karachaganak 3,125 8000 878 949 911 3,172 mln m³ (69%) came from mega projects, with the Tengiz Petroleum Operating B.V.) 7,395 and Karachaganak mega projects accounting for the bulk Kashagan (North Caspian Operating 3,016 223 301 293 of production. Company N.V.) Total for mega projects 2,948 3,087 3,099 Gas production values are the actual volume of gas produced, 6000 including gas reinjected for own needs. Gas reinjection is used to maintain reservoir pressure, which is essential for sustaining COMMERCIAL GAS PRODUCTION BY KMG-OPERATED ASSETS (NET TO KMG), MLN M3 high oil production rates. 1,861 2017 2018 2019 1,891 1,892 Ozenmunaigas + KazGPZ1 Commercial gas production in 2019 was 4,922 mln m³, of which 540 558 680 1,766 1,823 mln m³ were produced from operating assets and 3,099 Mangistaumunaigaz 4000 199 207 116 mln m³ from mega projects. Year-on-year, commercial gas (PD Zhetybaimunaigaz)1 Tengiz Karachaganak production increased by a cumulative 91 mln m³, or 1.9%. 700 Kazgermunai 235 205 184 637 Kashagan 49 397 Ozenmunaigas + KazGPZ Along with processing own feedstock, the KazGPZ plant Amangeldy Gas 339 345 346 709 614 618 630 Embamunaigas Kazakhoil Aktobe 180 173 157 produces commercial gas using feedstocks supplied by KMG’s 191 Karazhanbasmunai 198 221 260 2000 other operating assets that do not produce commercial gas Embamunaigas 30 154 135 19 18 22 27 Kazgermunai 299 224 themselves. 280 262 PetroKazakhstan Inc. Kazakhturkmunay 156 143 163 242 218 195 181 327 344 349 350 Amangeldy Gas PetroKazakhstan Inc. 78 68 43 378 378 393 394 Mangistaumunaigaz Kazakhoil Aktobe Karazhanbasmunai 0 0 0 308 301 249 348 187 175 161 143 Kazakhturkmunay Total for operating assets 1,757 1,853 1,823 2016 2017 2018 2019

1. JSC Ozenmunaigas and PD Zhetybaimunaigaz JSC Mangistaumunaigaz supply raw gas to KazGPZ.

54 55 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

OIL TRANSPORTATION KMG'S OIL PIPELINE NETWORK

PAVLODAR OIL KMG completed the construction of an oil CHEMISTRY PLANT transportation infrastructure to supply hydrocarbons to export markets. Medium-term priorities: 78.07 mln tonnes oil transportation volume • Increase existing capacity utilisation by making KPO KARACHAGANAK KMG’s oil transportation systems more attractive and competitive • Control over operating costs.

ATYRAU EMBAMUNAYGAS OIL REFINERY KAZAKHTURKMUNAY NCOC KAZAKHOIL AKTOBE KASHAGAN

The two oil transportation modes at KMG are trunk pipelines and the marine fleet. KAZGERMUNAI PETROKAZAKHSTAN KUMKOL RESOURCES

TCO TENGIZ

Trunk pipeline transportation Marine fleet TURGAI PETROLEUM transportation MANGISTAUMUNAIGAZ AMANGELDY GAS KARAZHANBASMUNAI

Management company KazTransOil (KTO) Kazakhstan-China MunaiTas (MT) Caspian Pipeline Kazmortransflot CASPI BITUM Pipeline (KCP) Consortium (CPC) (KMTF) OZENMUNAIGAS SHYMKENT OIL REFINERY Interest KMG: 90%1 KazTransOil: 50% KazTransOil: 51% KMG: 20.75% KMG: 100% (PKOP)

2 Transportation 44,463 8,100 1,648 13,126 10,729 MunaiTas North-West Pipeline Company LLP REFINING volume (net Kazakhstan-China Pipeline LLP to KMG) in 2019, OIL PUMPING STATION Caspian Pipeline Consortium thous. tonnes JSC KazTransOil OPERATING PRODUCTIONS ASSETS

Key destinations Export to Europe and China, Export to China, Export to China, Export to Europe Export to Europe MEGA PROJECTS domestic market domestic market domestic market HEAD OIL-PUMPING STATION

Key routes Kazakhstan’s refineries; Atasu — Kenkiyak — Tengiz — Black Sea and Operating productions assets Alashankou; Atyrau Novorossiysk Mediterranean KMG’S OIL PIPELINE NETWORK Mega projects Uzen — Atyrau—Samara; Sea; “KazTransOil” JSC (KTO) is the national operator of the trunk “Caspian Pipeline Consortium” (CPC) is international Kenkiyak-Kumkol oil pipeline of the Republic of Kazakhstan. The company owns oil transportation project involving Russia, Kazakhstan port of Aktau; Caspian Sea an extensive network of trunk oil pipelines with a total length and the world’s leading industry players. It was established oil transshipment to the CPC of 5,378 km, to which virtually all oil fields in Kazakhstan for the construction and operation of a 1,510 km trunk pipeline and Atasu —Alashankou are connected. The Company transports oil to Kazakhstan’s (452 km are within Kazakhstan). The CPC oil pipeline is a priority pipelines four major refineries, pumps oil for export via the Atyrau export route for Kazakhstan’s oil supplies, connecting Total length, km 5,378 1,759 449 1,510 n/a — Samara pipeline, tranships oil to the CPC and Atasu — Kazakhstan’s Tengiz oil field with the Yuzhnaya Ozereyevka Alashankou export pipelines, ships oil to tankers in the port oil terminal on the Black Sea (near the port of Novorossiysk). of Aktau and by rail. Oil transportation via trunk oil pipelines Oil transportation via the CPC pipeline is supported by 15 oil is supported by 36 oil pumping stations, 67 heaters, and a tank pumping stations, an oil storage tank farm with a total capacity farm for oil storage with a total capacity of 1.4 mln m3. of 1.3 mln m3 and three single-point moorings. “KazTransOil” JSC also provides operation and maintenance services for the trunk oil pipelines of “Kazakhstan-China In view of the anticipated increases in oil production Pipeline” LLP, “MunaiTas” North-West Pipeline Company LLP, from Tengiz and Kashagan, in 2019 the shareholders of Caspian PIPELINE INFRASTRUCTURE “Karachaganak Petroleum Operating B.V.”, “Caspian Pipeline Pipeline Consortium resolved to launch a project removing Consortium-K” JSC, and “Turgai Petroleum” JSC, as well of bottlenecks within the pipeline system, which is expected Kazakhstan’s pipeline infrastructure is owned by “KazTransOil” and the “Caspian Pipeline Consortium”. The existing pipeline as for the trunk water line of Main Waterline LLP. to increase the volume of Kazakhstan’s oil transportation JSC, its two joint ventures (“Kazakhstan-China Pipeline” infrastructure in Kazakhstan has adequate potential to support to 72.5 mln tonnes per year. The project timeframe is 2019– LLP and “MunaiTas” North-West Pipeline Company LLP) increased oil transportation volumes from promising projects. “Kazakhstan-China Pipeline” LLP is the owner of the Atasu 2023, and its cost is USD 600 mln. The project will be financed — Alashankou (965 km) and Kenkiyak — Kumkol (794 km) oil using the Caspian Pipeline Consortium’s own funds. pipelines. The company transports Kazakhstan’s oil and transit Russian oil to China and to the domestic market.

“MunaiTas” North-West Pipeline Company LLP is the owner of the 449 km Kenkiyak — Atyrau oil trunk pipeline. In 2018, the company started implementing the Kenkiyak- Atyrau pipeline reverse project to support supplies of West Kazakhstan’s oil to domestic refineries and to compensate production decline in Aktobe and Kyzylorda regions, as well

as exports to China totalling up to 6 mln tonnes per year. 9.1 thous. km The project cost is KZT 28.6 bln. The start of oil flow reversal total length of trunk oil pipelines

1. is scheduled for the second half of 2020. 10% of shares of KTO are owned by minority shareholders who acquired them within the "People's IPO" program. 2. Since KTO is fully operated by KMG, transportation volumes are being reported for 100%.

56 57 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KazTransOil Kazakhstan-China Pipeline OIL TRANSPORTATION BY SEA TRUNK PIPELINE OIL TRANSPORTATION HIGHLIGHTS MunaiTasSTRUCTURE OF OIL TRANSPORTATION BY DIRECTIONS FOR 2019 The consolidated volume of oil transportation via trunk Caspian Pipeline Consortium TRANSPORTATION ASSETS pipelines was 67,337 thous. tonnes in 2019, a slight decrease KazTransOil 38 33 3838% 40% 22% NMSC Kazmortransflot LLP is the National Sea Carrier. Its assets TRANSPORTATION VOLUMES, THOUS. TONNES of 622 thous. tonnes from the previous year, mainly due to lower include: Kazakhstan-China oil production in the Kyzylorda Region. • merchant fleet – owned oil tankers: Astana, Almaty Pipeline 40 5 6233% 5% 100 62% 2019 10,186 543 10,729 and Aktau, each with a deadweight of 12 thous. tonnes; MunaiTas 38% 62% 22 62 Atyrau, Aktobe and Oral with a deadweight of 13 thous. 2018 4,339 2,738 7,077 Volume of oil transportation (net to KMG), thous. tonnes1 Caspian Pipeline tonnes; and Aframax oil tankers – Alatau and Altai, each 100% Consortium with a deadweight of 115 thous. tonnes 2017 4,471 2,480 6,951 1,648 • marine support fleet: 12 vessels – tugboats Esil, Tobol, Ural, 2019 44,463 8,100 13,126 67,337 Irtysh, 8 barge platforms of KMG series with a capacity Black Sea and Mediterranean Sea Domestic Export Transit 1,978 of 3,600 tonnes each Caspian Sea 2018 45,309 7,999 12,675 67,961 • a fleet to support Tengizchevroil’s Future Growth Project: 1,867 Volume of oil transportation, thous. tonnes 2017 46,293 8,269 11,435 67,864 3 Caspian-class barges (MCV) – Barys, Berkut and Sunkar, and 3 tugboats – Talas, Emba and Irgiz. As of December In February 2019, the member states of the Eurasian Economic KazTransOil (100%) Company 2017 2018 2019 31, 2019, the Berkut and Sunkar vessels were devalued Union signed navigation agreements reducing the time Kazakhstan-China Pipeline (50%) KazTransOil (100%) 4 6 , 2 9 3 45,309 4 4 , 4 6 3 and contracts with TCO to be completed in 2020. for obtaining transit permits for Russia’s waterways to 10 days. MunaiTas (51%) Caspian Pipeline Consortium (20.75%) Kazakhstan-China Pipeline 1 6 , 5 3 8 1 5 , 9 9 7 1 6 , 2 0 0 The main current routes for oil transportation by sea: In April 2019, a feeder service was launched along the Trans- (100%) • Routes in the Caspian Sea waters Caspian International Transport Route, under the terms MunaiTas (100%) 3 , 6 6 0 3 , 8 7 8 3,232 • Routes in the Black Sea and Mediterranean Sea waters. of the cargo transportation agreement between NC Kazakhstan Tariff policy Caspian Pipeline Consortium 5 5 , 1 0 8 6 1 , 0 8 4 6 3 , 2 5 6 Temir Zholy JSC, NC KazMunayGas JSC, KTZ Express Shipping The tariffs for crude oil transportation to Kazakhstan’s (100%) PERFORMANCE HIGHLIGHTS LLP, and NMSC Kazmortransflot LLP. domestic market are regulated by the government. In 2019, the total volume of oil transportation by sea increased significantly by 52% year-on-year to 10,729 thous. tonnes. Oil In June 2019, NMSC Kazmortransflot LLP successfully Following the adoption in 2015 of amendments to the Law transportation volumes in the Mediterranean and Black Seas transported the Satti jack-up drilling rig from ERSAI base of Republic of Kazakhstan on Natural Monopolies dated increased 1.5 times, due to the supply and transportation at the port of Kuryk (Kazakhstan) to the port of Baku 27.12.2018 №204-VI, oil transportation services to support agreement signed at the end of 2018 between Kazmortransflot, (Azerbaijan). transit via the territory of the Republic of Kazakhstan KMG, and KMG International. and exports outside the Republic of Kazakhstan were removed from the list of natural monopolies.

Tariffs for oil transportation GAS TRANSPORTATION AND MARKETING

Company 2017 2018 2019 UPDATED STRATEGIC GAS INITIATIVES KazTransOil domestic market, KZT per tonne per 1,000 km 3,902 4,292 4,722 Updated strategic gas initiatives In 2019, KMG refreshed its strategy for gas transportation and marketing,

export, KZT per tonne per 1,000 km 5,817 6,399 6,399 adding three more initiatives to its key initiative of gas exports to China.

transit to China, USD per tonne 3.11 3.11 4.23 To fully unlock its gas transportation potential and boost KMG prioritises meeting the consumer needs reliably Kazakhstan-China Pipeline the share of exports and transit fees in KMG’s revenues, and efficiently and diversification of gas sales markets. domestic market, KZT per tonne per 1,000 km 5,916 6,507 7,158 the Company has focused on: The throughput capacity of the gas transportation infrastructure has been aligned with the potential growth export, KZT per tonne per 1,000 km 6,799 6,799 6,799 • Gas exports to China The expansion of the Beineu-Bozoi-Shymkent of gas production in the country. With timely investments into transit to China, USD per tonne 8.25 8.25 10.77 and Kazakhstan-China trunk gas pipeline capacity enables the gas transportation system, KMG has been able to supply MunaiTas KMG to increase stable export supplies of commercial the country’s regions with natural gas and grow the potential gas to China up to 10 bln m3 per year starting from 2019 of export supply routes. KazTransGas JSC, KMG’s wholly-owned domestic market, KZT per tonne per 1,000 km 5,912 5,912 5,912 and beyond. subsidiary, is the operator of our gas transportation system. export, KZT per tonne per 1,000 km 5,912 5,912 5,912 • Exports of gas products Caspian Pipeline Consortium KMG is considering the construction of facilities to produce high value-added gas products for domestic and export export, USD per tonne 38 38 38 sales. • Ensuring efficient use of gas in the domestic market KMG will continue engaging government authorities to ensure efficient gas consumption in the domestic market. • Enhancing transit potential

1. Consolidated volume of oil transported includes the transportation volume of each individual pipeline company, including the operating share of KMG (excluding KMG will continue to focus on maximising profitability KazTransOil). Part of the oil volumes can be transported by two or three pipeline companies, and these volumes are correspondingly counted more than once of transit flows from neighbouring countries leveraging in the consolidated volume of oil transportation. its advantageous position between the expanding major markets of China and Russia.

58 59 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

GAS PIPELINE INFRASTRUCTURE INVESTMENT PROJECTS BUKHARA-URAL 3 CENTRAL ASIA-CENTER up to 15 bln m per year KazTransGas JSC is Kazakhstan’s national gas and gas supply Increasing the capacity of Beineu-Bozoy-Shymkent trunk Increase in the capacity of the Beineu-Bozoi- 3 operator. SOYUZ, gas pipeline up to 15 bln m per year Shymkent trunk gas pipeline ORENBURG-NOVOPSKOV

KazTransGas operates the centralised infrastructure NUR-SULTAN The construction of the Beineu-Bozoy-Shymkent trunk gas for commercial gas transportation via trunk pipelines pipeline was started in 2011. In 2019, the following activities Reconstruction of the Bozoy underground gas storage 3 and gas distribution networks, supports international transit SARYARKA were carried out to increase capacity to 15 bln m per year: facility and marketing of gas on the domestic and foreign markets, • The Korkyt-Ata, Aral and Turkestan compressor as well as designs, finances, builds and operates gas pipelines stations were commissioned. The gas pipeline capacity In order to smooth out seasonal unevenness in gas AKSHABULAK- 1 3 and gas storage facilities. KYZYLORDA at the Bozoy-Shymkent section was increased to 13 bln m consumption and to ensure stable gas supplies to the domestic per year market and export, ICA is reconstructing the Bozoy KazTransGas operates the largest trunk gas pipeline network • Design and estimate documentation was developed underground gas storage facility. Within the project to improve in Kazakhstan with a total length of 19,146 km and an annual and core equipment for the construction of the fourth the quality of the gas, to purify it from mechanical impurities capacity of 230 bln m3, as well as gas distribution networks BEINEU- KAZAKHSTAN- compressor station “1A” on the Beineu-Bozoi section and moisture, it was retrofitted with a modern gas drying BOZOI-SHYMKENT CHINA with a length of over 49 thous. km. is being procured, scheduled for completion in 2020 unit. The work carried out will help to increase the reliability 1 BGR-TBA , • For the expansion of the existing compressor station and safety of the gas storage, as well as to increase the daily GAZLI-SHYMKENT KazTransGas operates three underground gas storage facilities Bozoi, and Akbulak and Beineu gas metering stations productivity of gas extraction and injection to the projected 27 (Bozoy, Akyrtobe, and Poltoratskoye) in Kazakhstan with a total Intergas Central Asia JSC the feasibility study was carried out and design mln m3 per day. It is expected that the projected gas storage working gas capacity of up to 4.6 bln m3. Gas transportation Beineu-Shymkent Gas Pipeline LLP and estimate documentation was finalized and approved. volume of 4 bln m3 will be achieved in 2020. is supported by 40 compressor stations and 232 gas pumping Asia Gas Pipeline LLP units.

KazTransGas has subsidiaries in Kazakhstan in the following TRUNK PIPELINE GAS TRANSPORTATION TOTAL GAS TRANSPORTATION VOLUMES (NET TO KMG), MLN M3 business segments: • Trunk pipeline gas transportation The volume of gas transportation via KMG’s main pipelines – Intergas Central Asia JSC, KazTransGas’ wholly-owned 17.85 thous. km declined in 2019 by 7.2% to 103,494 mln m3 mainly due 2019 25% 57% 17% 103,494 total length of trunk gas pipelines subsidiary to a decrease in gas transit following the reallocation of Russian 2018 18% 67% 14% 111,567 – Asia Gas Pipeline LLP, KazTransGas’ 50%-owned gas flows by and lower Central Asian gas transit subsidiary volumes to China. 2017 17% 68% 14% 100,857 – Beineu-Shymkent Gas Pipeline LLP, KazTransGas’ 50%- owned subsidiary Exports Transit • Transportation via gas distribution systems Intergas Central Asia JSC Domestic market – KazTransGas Aimak JSC, KazTransGas’ wholly-owned subsidiary Intergas Central Asia is a wholly-owned subsidiary of KazTransGas. In 2018, ICA received the status of the National • Gas and condensate production Gas Pipeline Operator. GAS TRANSPORTATION VOLUMES BY INTERGAS CENTRAL ASIA (NET TO KMG), – Amangeldy Gas LLP, KazTransGas’ wholly-owned MLN M3 subsidiary (see the Production section for production Today, ICA carries out internal transportation and transit data). of natural gas within the territory of Kazakhstan through gas 2019 19,069 40,229 13,663 72,961 pipelines with a total length of 19,146.51 km. 2018 18,873 47,693 13,568 80,135 ICA operates 3 underground gas storages (UGS): • Bozoyskoye UGS facility in the Aktobe region 2017 16,710 46,938 12,916 76,565 Company Trunk gas pipeline Length, km Capacity, bln m3 per year • Poltoratskoe UGS in the South Kazakhstan region • Akyrtobinskoye UGS in the Zhambyl region. Exports ICA Soyuz, Orenburg-Novopskov 1,147 68.4 Transit Central Asia-Center 5,306 50.8 Intergas Central Asia’s core businesses: Domestic market • gas transportation to the domestic market of the Republic Bukhara-Ural 2,382 31.5 of Kazakhstan BGR-TBA1, Gazli-Shymkent 2,462 10.2 • transit transportation of gas from Turkmenistan and Uzbekistan to Russia via Kazakhstan Akshabulak-Kyzylorda 123 0.4 • transportation of gas for export Saryarka4 1,061 2.2 2 • transit transportation of gas from one part of Russia to another via Kazakhstan AGP Kazakhstan-China 3,916 55 • transit transportation of Uzbekistan’s gas to supply Tashkent. BSGP Beineu-Bozoi-Shymkent 1,454 13 3

1. Bukhara gas-bearing region - Tashkent-Bishkek-Almaty. 2. For the 1st stage of the gas pipeline, the design and actual capacity is 2.2 bln m3 per year. 3. Actual capacity - 13 bln m3 per year, design capacity - 15 bln m3 per year. 4. Saryarka trunk gas pipeline was leased to ICA, but is owned by AstanaGaz KMG JSC, shareholders of which are Samruk-Kazyna JSC (50%) and Baiterek Venture Fund JSC (50%).

60 61 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

Asia Gas Pipeline LLP Beineu-Shymkent Gas Pipeline LLP Gas distribution and gasification projects in the regions NGV INFRASTRUCTURE of Kazakhstan Asia Gas Pipeline is a 50/50 joint venture between KazTransGas Beineu-Shymkent Gas Pipeline LLP is a 50/50 joint venture KazTransGaz Onimderi LLP JSC and Trans-Asia Gas Pipeline Company Ltd. (shareholder – between KazTransGas JSC and Trans-Asia Gas Pipeline Upgrade of the gas distribution network in Taraz CNODC, a subsidiary of CNPC). The joint venture was Company Ltd. (shareholder – CNODC, a subsidiary In 2019, KazTransGaz Onimderi together with KazTransGas established to finance, construct and operate a section of CNPC). The project is of paramount strategic importance Since its launch in 2011, the project has replaced continued to implement initiatives in Kazakhstan’s regions of the Kazakhstan-China gas pipeline designed to transport to the Republic of Kazakhstan, as it supplies the natural gas about 899 km of low-pressure steel gas pipelines (37 km in 2019) under the 2019–2022 Action Plan to expand the use natural gas from the Kazakhstan-Uzbekistan border needs of Kazakhstan’s southern regions, enables diversification with polyethylene medium-pressure gas pipelines in the private of natural gas as a motor fuel, approved by Resolution to the Khorgos gas metering station in China. of Kazakhstan’s gas exports, ensures energy security sector for 42 thous. customers, resolving the problem No. 797 of the Government of the Republic of Kazakhstan of the country, and builds a unified gas transportation system. of inadequate gas pressure for consumers. As a result, dated 29 November 2018 (the “Action Plan”) and the Concept The purpose of the project is to facilitate the transit of Turkmen the throughput of the gas supply system has increased 1.5 times of Kazakhstan’s transition to a green economy. These and Uzbek gas to China, exports of Kazakh gas to China, as well The Beineu-Bozoy-Shymkent trunk gas pipeline is the second to 150.5 thous. m3 per hour. efforts focused on converting motor vehicles to a more as uninterrupted gas supply to southern regions of Kazakhstan. section of the Kazakhstan-China gas pipeline. The gas environmentally friendly and efficient type of motor fuel pipeline connects the western oil and natural gas fields Upgrading, retrofitting and expanding the gas distribution instead of conventional fuels for vehicles such as petrol The length of the gas pipeline within Kazakhstan is 2,612 km with the southern regions of the country, as well as with the gas networks supplying communities in Mangystau Region or diesel. The main consumers of compressed natural gas (CNG) for Strings A and B, and 1,304 km for String C. The total pipelines of the Bukhara gas-bearing region, the Tashkent- will be city bus fleets, long-haul vehicles, private passenger throughput capacity of the gas pipeline is 55 bln m3 per year Bishkek-Almaty gas pipeline, the Gazli-Shymkent gas pipeline Since its launch in 2015, the project has constructed fleets, trucks and cars of the regional branches of KazTransGas (30 bln m3 Strings A and B, 25 bln m3 String C). and string “C” of the Central Asia-China gas pipeline. The actual or upgraded 1,347 km of gas pipelines (25 km in 2019), subsidiaries, as well as private vehicles. length of the Beineu-Shymkent gas pipeline is 1,454 km and installed 6 automated gas distribution stations, 34 gas In 2018, the project “Increasing the capacity of the Kazakhstan- and capacity is 13 bln m3 per year. control units, and 45 gas control modules. As a result, five DEVELOPMENT OF A PROJECT FOR THE USE OF NATURAL GAS China gas trunk pipeline” (String C) was completed. As a result, settlements were connected to the gas grid, with 2,500 new AS A MOTOR FUEL the productivity of the Kazakhstan-China trunk pipeline was customers getting access to gas. Land plots were allocated for the construction of CNG filling increased to 55 bln m3 per year. GAS TRANSPORTATION VOLUMES BY BEINEU-SHYMKENT GAS PIPELINE stations in Almaty and Shymkent, and in the Aktobe, Turkestan, (NET TO KMG), MLN M3 Expanding gas infrastructure in Almaty, retrofitting Mangistau, Kyzylorda, Atyrau and Almaty Regions. CNG-fuelled The project “Increasing the productivity of strings A and B and upgrading the city’s gas distribution systems city passenger buses hit the roads in Aktobe (78 buses), Almaty 3 to 40 bln m per year” is under the study. It is expected that 2019 3,546 1,498 5,044 (400 buses), Shymkent (200 buses), and Kyzylorda (120 buses). the project will allow to increase the total productivity of the gas The project will allow the connection of about 4.1 thous. new Plans for 2020 also include purchasing 960 more CNG buses pipeline to 65 bln m3 per year. 2018 2,628 1,548 4,176 customers with an average annual gas consumption of 15.8 mln for Shymkent (590), Almaty (200), and Atyrau (170). m3. On January 1, 2020 265 km (170 km in 2019) of new gas 2017 501 1,683 2,185 pipelines were built, 76 km (34 km in 2019) of existing pipelines Under the memorandum of cooperation signed between GAS TRANSPORTATION VOLUMES BY ASIA GAS PIPELINE (NET TO KMG), were reconstructed, 21 cabinet gas control points, 1 gas control Gazprom, CNPC and KMG to develop production and marketing Exports MLN M3 block point were installed. infrastructure supporting the use of natural gas as a motor Domestic market fuel along the Europe–Western China international transport 250 Construction of the Saryarka trunk gas pipeline corridor route, market research was continued on vehicle traffic 2019 3,545 19,140 22,935 intensity and the related LNG/CNG consumption volumes, 413 In October 2019, the construction of Phase 1 of the Saryarka along with the review and analysis of existing technologies, 2018 2,742 21,480 24,635 GAS DISTRIBUTION AND EXPANSION OF GAS trunk gas pipeline was completed , and in December of the same and estimation of the infrastructure capacity and capital 243 year the Commissioning Act was signed. In February 2020, requirements. 2017 501 18,862 19,607 INFRASTRUCTURE IN KAZAKHSTAN’S REGIONS the gas pipeline was leased out to Intergas Central Asia JSC, Exports KAZTRANSGAS AIMAK JSC which will be responsible for gas transportation. Saryarka trunk A memorandum of cooperation was signed with the national Transit KazTransGas Aimak is a wholly-owned subsidiary gas pipeline is owned by AstanaGaz KMG JSC, shareholders road operator NC KazAvtoZhol JSC to develop production Domestic market of KazTransGas. KazTransGas Aimak is the largest gas of which are Samruk-Kazyna JSC (50%) and Baiterek and marketing infrastructure supporting the use of CNG distributor in Kazakhstan, operating 50.6 thous. km Venture Fund JSC (50%). The throughput capacity of Phase 1 as a motor fuel in the Republic of Kazakhstan. Five land plots of distribution and trunk gas pipelines in all ten regions and two of the pipeline is up to 2.2 bln m3 per year. The total length have already been approved and fully permitted for use along cities of national significance connected to the gas grid. of the gas pipeline is 1,060.6 km. The gas pipeline will ensure the international transport corridor route (in Kazalinsk, Irgiz, stable gas supplies to the central regions and the capital Aralsk, Karabutak, and Kazygurt). The key objectives of KazTransGas Aimak: of Kazakhstan, totalling about 2,710 thous. people. The Saryarka • ensuring commercial gas supplies trunk gas pipeline will facilitate transition to an affordable, 798 buses are running on KMG's gas and motor fuel. • transportation of gas via distribution networks greener fuel, natural gas, significantly improving the overall • management of gas transportation assets in the regions. environmental situation in the country.

GAS TRANSPORTATION VOLUMES BY KAZTRANSGAS AIMAK (NET TO KMG), MLN M3

2019 5,0 2,554

2018 4,2 2,622

2017 2,501

62 63 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

DIGITALISATION DOWNSTREAM From 2017 to 2023, we are running a project to roll out As the next step, the 1C: Maintenance Management solution an analytical geographic information system covering gas was integrated with 1C: Accounting, resulting in linking inventory pipeline facilities which analyses digital spatial data on gas costs by equipment of both systems. transportation system facilities, and presents their spatial position and information on their technical and operational To prevent unauthorized air emissions, and protect the life parameters. and health of consumers, KazTransGaz Onimderi purchased four auto labs based on Toyota Hilux vehicles, equipped In 2019, Amangeldy Gas LLP rolled out the 1C: Maintenance with PERGAM digital sensors to detect methane leaks. Management IT solution. The solution provided visibility As of the writing of this report, the labs have detected 235 leaks and transparency into the maintenance and repair process, in residential premises and social facilities, with the total as well as streamlined hierarchical storage of equipment number of leaks detected running into 8,766. data and offered access to the process to all stakeholders.

GAS MARKETING

As the national gas and gas supply operator, KazTransGas The gas supplied by the above companies is marketed exercises the government’s preemptive right to purchase raw in the domestic market. and/or commercial gas from subsoil users/suppliers. Companies with a KMG interest that are exempt In accordance with the law, subsoil users send a commercial from the government’s preemptive right to acquire gas: offer to the national operator, indicating the volumes, price • Amangeldy Gas LLP (100%) and delivery point for the proposed supply of raw and/or • KazGPZ LLP (100%) commercial gas. The national operator uses its own judgement • Tengizchevroil LLP (20%) to decide whether to exercise or waive the government’s • Karachaganak Petroleum Operating B.V. (10%) preemptive right. • North Caspian Operating Company N.V. (8.44%) Following the completion of the modernisation programme, OIL AND CONDENSATE MARKETING Currently, the national operator exercises the government’s The above companies all sell gas domestically and for export. which has enabled the Company’s oil refineries in Kazakhstan preemptive right to acquire gas from the following companies and Romania to achieve higher refining depths, the key In 2019, sales of own oil and condensate produced with KMG interest: Commercial gas sales volumes in 2019 were 22,834 mln m3, objectives for these assets in line with the 2018–2028 Strategy by KMG amounted to 23,509 thous. tonnes, including • Embamunaigas JSC (100%) with 8,806 mln m3 of gas exported, of which 81% were sent include: 16,379 thous. tonnes of oil exports, and 7,130 thous. tonnes • JV Kazgermunai LLP (50%) to China under a signed sales and purchase agreement • for Kazakhstan refineries: to ensure adequate liquidity of domestic oil supplies. Supplies to KMG refineries • Kazakhoil Aktobe LLP (50%) to export gas to China. generation through cost optimisation to be able to timely in Kazakhstan are fully included into domestic oil supplies: • Kazakhturkmunay LLP (100%) meet liabilities as they fall due 2,994.82 thous. tonnes to Atyrau Refinery, 3,158.95 thous. • KazMunayTeniz LLP (100%) • for Petromidia Refinery: to improve performance tonnes to Pavlodar Refinery, 517.81 thous. tonnes to Shymkent by streamlining production processes, including through Refinery, and 448.56 thous. tonnes to Caspi Bitum. digitisation and oil product slate optimisation to increase sales margins, and ensure a steady dividend flow to the KMG 3 Corporate Centre. 22.8 bln m commercial gas sales 23.5 mln tonnes own oil sales

Gas resources, mln m3 Sales of commercial gas , mln m3 Sales and condensate of KMG produced oil, thous. tonnes

Indicator 2017 2018 2019 Gas sales by KazTransGas 2017 2018 2019 Assets 2017 2018 2019

Gas purchase volumes 18,153 23,297 24,200 Exports 4,949 8,917 8,806 Exports Domestic Total Exports Domestic Total Exports Domestic Total market market market Kazakhstan subsoil users / 13,376 17,209 16,435 Russia 2,073 2,350 1,000 suppliers Operating assets1 9,727 6,169 15,896 8,773 6,980 15,752 8,472 7,120 15,592 Kyrgyzstan 249 275 264 Companies with KMG 6,446 10,195 9,537 - including subsidiaries 2 5,922 2,687 8,607 5,367 3,303 8,670 5,325 3,453 8,778 participation China 1,003 5,484 7,091 Mega projects 3 7,525 3 7,529 7,971 12 7,983 7,907 10 7,917 Third parties 6,930 7,014 6,898 Uzbekistan 1,624 807 452 TOTAL 17,252 6,173 23,424 16,744 6,991 23,735 16,379 7,130 23,509 Gas imports 4,777 6,088 7,765 Domestic market 12,793 13,999 14,028 Russia 3,038 3,216 5,054 Total gas sales 17,742 22,915 22,834

1. Uzbekistan 1,739 2,872 2,710 Ozenmunaigas, Embamunaigas, Karazhanbasmunai, Kazgermunai, PetroKazakhstan, Kazakhturkmunay, Kazakhoil Aktobe, Mangistaumunaigaz. 2. Ozenmunaigas, Embamunaigas, Kazakhturkmunay. 3. KMG Kashagan B.V., KMG Karachaganak, Tengizchevroil LPP.

64 65 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

KMG REFINING ASSETS TARIFF POLICY

Within KMG’s asset mix, four refineries in Kazakhstan and two in Romania are responsible for processing liquid hydrocarbons Kazakhstan refineries only offer oil refining services using from 1 January 2017 the Government no longer regulates (primarily oil). the set tariffs and do not purchase oil for refining or sell refining prices, which has significantly simplified the process refined oil products. Oil suppliers sell finished oil products for agreeing oil refining tariff changes, which are currently independently. The refineries focus exclusively on production coordinated by the Ministry of Energy of the Republic issues, streamlining refining activities and reducing costs. of Kazakhstan. KMG refineries • The tariff for refining 1 tonne of oil at Shymkent Refinery Oil refining tariffs at Kazakhstan refineries factor in actual was revised twice: from 1 July from 22,500 KZT (net of VAT) Indicator Kazakhstan refineries Romania refineries production-related operating expenses and an investment to 24,750 KZT (net of VAT), and from 1 October to 28,059 KZT component (capital expenditures to maintain current (net of VAT). Atyrau Pavlodar Shymkent Caspi Bitum Petromidia Vega production rates, modernisation loans). • On 3 December 2019, Deputy Energy Minister of the Republic Refinery Refinery Refinery of Kazakhstan A. M. Magauov approved the tariff for oil Location Atyrau Pavlodar Shymkent Aktau Navodari Ploiesti According to the Law On Amendments and Additions to Certain refining at Pavlodar Refinery LLP at 20,904 KZT (net of VAT) Commissioning date 1945 1978 1985 2013 1979 1905 Legislative Acts of the Republic of Kazakhstan Concerning from 1 January 2020. Entrepreneurship in Kazakhstan dated 29 October 2015, Refining design capacity, mln tonnes 5.5 6.0 6.0 1.0 6.0 1 0.5

Hydrocarbon refining volumes in 2019, mln 5.4 5.3 5.4 0.89 6.33 2 0.44 tonnes Refinery utilisation rate in 2019 98 88 90 89 97.5 3 132 Weighted average tariffs to refine 1 tonne of tolling feedstock and relevant costs, KZT KMG interest 99.53 100 49.72 50 54.63 54.63 Nelson Index 13.9 10.5 8.2 – 10.5 – Weighted average tariffs of refineries, 2017 2018 2019 KZT per tonne Light product yield in 2019 59 69 76 – 86.01 – Atyrau Refinery 23,370 33,810 37,436 Refinery co-owners – – CNPC CITIC Romanian Romanian Government Government Pavlodar Refinery 15,429 17,250 19,805

Shymkent Refinery 12,809 19,579 24,485

Atyrau Refinery was built in 1945, with Pavlodar Refinery • A record output of bitumen was achieved at JV Caspi Bitum Caspi Bitum 16,667 18,008 18,010 coming online in the 1970s. Shymkent Refinery was LLP, with 369 thous. tonnes of bitumen produced, fully commissioned in the mid-1980s, while Caspi Bitum was covering domestic market needs. launched in 2013 to support the development of a modern The tariff includes an amount which covers operating expenses, capital expenditure and investment expenditure. Investment refining sector in Kazakhstan. expenditure is used to repay loans (principal and interest) raised to finance capital-intensive refinery modernisation projects.

In 2007, KMG purchased Group, which incorporates the Petromidia Refinery (the largest refinery in Romania) 23.76 mln tonnes and the Vega Refinery (the only extraction naphtha producer total hydrocarbon refining in Central and Eastern Europe). The company has since been renamed KMG International.

In 2019, the following projects were implemented under the strategy: • The utilisation of new capacities resulting from the modernisation of three oil refineries (Atyrau Refinery, Pavlodar Refinery, and Shymkent Refinery) allowed KMG to fully meet domestic demand for oil products. The potential oil refining output of the refineries increased to 18.5 mln tonnes per year, and the refining depth grew by 10% to reach 90%. Kazakhstan’s domestic consumers were fully self-sufficient in fuels and lubricants (K4, K5). 37 thous. tonnes of petrol were exported • Pavlodar Refinery is making progress on its Yertis project, which will allow for the production of winter diesel fuels with a cloud point of –32°C or lower • The output of petrochemicals (benzene and paraxylene) at the Atyrau Refinery LLP increased to 145 tonnes (+ 445%)

1. Design capacity includes refining 5 mln tonnes of oil and 1 mln tonnes of other hydrocarbons per year. 2. Total refining volume of 6.33 mln tonnes includes 5.43 mln tonnes of crude oil and 0.9 mln tonnes of other and alternative feedstocks. 3. Petromidia Refinery’s utilisation rate is 97.5% as per Solomon Associates methodology.

66 67 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

REFINING VOLUMES AT KAZAKHSTAN REFINERIES PRODUCTION AND MARKETING OF OIL PRODUCTS DERIVED FROM KMG’S OWN OIL

In 2019, hydrocarbon refining volumes at Kazakhstan refineries KMG’s operating assets Ozenmunaigas, Embamunaigas thous. tonnes to the Atyrau Refinery and 1,131 thous. tonnes (net to KMG) amounted to 13,822 thous. tonnes, or 288 thous. and Kazakhturkmunay supply Atyrau and Pavlodar Refineries, to the Pavlodar Refinery. The two refineries’ combined output barrels per day. In 2019, refining volumes increased by 438 13,822 thous. tonnes and the resulting oil products are subsequently sold wholesale for the year was 3,114 thous. tonnes of oil products, including thous. tonnes, or 3.3% year-on-year, mainly due to a refining liquid hydrocarbon refining volume domestically and for export. 1,892 thous. tonnes of light products, 878 thous. tonnes volume increase by 335 thous. tonnes, or 14,1%, at Shymkent of dark products, 63 thous. tonnes of petrochemicals, and 281 Refinery resulting from a capacity increase following its In 2019, Ozenmunaigas, Embamunaigas and Kazakhturkmunay thous. tonnes of other oil products. modernisation. supplied 3,453 thous. tonnes of oil for refining, including 2,322

Refinery output of oil products derived from KMG’s own oil in 2019, thous. tonnes Hydrocarbon refining volumes (net to KMG), thous. tonnes

Refinery 2017 2018 2019 Oil products Atyrau Refinery Pavlodar Refinery Total Average oil product wholesale prices over 12M 2019, KZT per tonne Atyrau Refinery 4,724 5,268 5,388 Light 1,207 685 1,892 160,851 Pavlodar Refinery 4,747 5,340 5,290 Dark 686 192 878 105,131 Shymkent Refinery (50%) 2,343 2,366 2,701 Petrochemicals 63 0 63 224,851 Caspi Bitum (50%) 359 409 443 Other 119 162 281 38,341 Total (net to KMG) 12,173 13,384 13,822 Total 2,074 1,039 3,114 137,001

OIL PRODUCT OUTPUT IN KAZAKHSTAN KMG sells oil products wholesale after the oil purchased In the domestic market, 1,331 thous. tonnes of gasoline from Ozenmunaigas, Embamunaigas and Kazakhturkmunay and diesel fuel were shipped to the retail chain of filling stations In 2019, the oil product output (net to KMG) increased by 361 Increased light product yields were a key driver of change is refined at the Atyrau and Pavlodar Refineries. In 2019, KMG of KMG Onimderi LLP and Petro Retail LLP, 205 thous. tonnes thous. tonnes, or 3.0% year-on-year, to 12,513 thous. tonnes across Kazakhstan’s three largest refineries, boosting the value sold 3,136 thous. tonnes of oil products, primarily petrols, diesel of diesel fuel for agricultural producers, 51 thous. tonnes of fuel of finished products due to a refining volume increase of hydrocarbon product slates. These changes resulted fuel and fuel oil (80%). oil for heating social and production facilities and institutions, at Shymkent Refinery resulting from a refining capacity increase from the modernisation programme at Kazakhstan refineries. 120 thous. tonnes of gasoline, diesel fuel and jet fuel and 41 following its modernisation. In 2019, light product yield was 64% The bulk of oil products was sold domestically (2,333 thous. thous. tonnes of fuel oil were delivered to KMG Aero LLP compared to 61% in 2018. In 2019, KMG fully covered domestic out of 3,136 thous. tonnes), and the remainder was exported to meet the needs of the Single Operator for the supply of light market demand for light products. (804 thous. out of 3,136 thous. tonnes). The ratio of domestic petroleum products and fuel oil for law enforcement agencies, to export oil product supplies was largely flat year-on-year. airports and commercial aviation, 585 thous. tonnes of oil products to third parties. Oil product output (net to KMG), thous. tonnes

Oil products 2017 2018 2019 REFINING IN ROMANIA Atyrau Refinery 4,481 (100%) 4,742 (100%) 4,852 (100%)

Light 1 2,020 (45%) 2,691 (57%) 2,850 (59%) In 2007, KMG acquired Rompetrol Group, which incorporates is focused on trading in crude oil and oil products produced Dark 2 2,236 (50%) 1,589 (34%) 1,580 (33%) Petromidia Refinery (the largest oil refinery in Romania) by KMG International refineries or by third parties. and Vega Refinery (the only extraction naphtha producer Petrochemicals3 8 (0.2%) 32 (0.7%) 145 (3%) in Central and Eastern Europe). The company has since been In 2019, our refineries in Romania processed 6,767 Other 217 (4.8%) 430 (9%) 277 (6%) renamed KMG International. thous. tonnes of hydrocarbons and other feedstocks, or 17.3 Pavlodar Refinery 4,262 (100%) 4,855 (100%) 4,746 (100%) thous. tonnes per day. Hydrocarbon refining volumes increased The core business of KMG International is hydrocarbon refining, by 436 thous. tonnes, or 6.9% year-on-year, largely due Light 2,695 (63%) 3,243 (67%) 3,271 (69%) as well as wholesale and retail sales of oil products. The KMG to improved feedstock blending and sustained record-high Dark 973 (23%) 1,007 (21%) 898 (19%) International-owned Petromidia Refinery is responsible average daily refining rates at the Petromidia Refinery. for primary hydrocarbon refining, with the Vega Refinery Other 594 (14%) 605 (12%) 576 (12%) focusing on secondary refining. The Petromidia and Vega Shymkent Refinery (50%) 2,195 (100%) 2,151 (100%) 2,476 (100%) Refineries operate according to the model where refineries HYDROCARBON REFINING VOLUMES (NET TO KMG), THOUS. TONNES Light 1,258 (57%) 1,422 (66%) 1,881 (76%) purchase hydrocarbons for their own account, refine them and then sell them either wholesale or retail through an owned Dark 887 (40%) 644 (30%) 447 (18%) retail network of filling stations. 2019 6,331 436 6,767 Other 49 (2%) 85 (4%) 148 (6%) 2018 5,925 406 6,331 Caspi Bitum (50%) 353 (100%) 405 (100%) 438 (100%) KMG International also owns a major petrochemical complex producing polypropylene and low- and high- Total (net to KMG) 11,291 12,152 12,513 2017 5,662 373 6,035 density polyethylene (LDPE and HDPE). In addition, KMG Trading AG, the trading subsidiary of KMG International, Petromidia 1. Including petrol, diesel fuel, and jet fuel. 2. Vega Including fuel oil, vacuum gas oil, and bitumen. 3. Including benzene and paraxylene.

68 69 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

OIL PRODUCTS PRODUCTION DEVELOPMENT PROJECTS In 2019, oil product output increased by 429 thous. tonnes, SERVICE PROJECTS or 6.9% year-on-year, to 6,614 thous. tonnes due to improved KMG is contributing to the social and economic development To ensure reliable power supply and safe operation of oil field feedstock blending at the Petromidia Refinery and higher To deliver their optimisation programmes, KMG’s of Zhanaozen in the Mangystau Region, by building a new gas facility electrical installations, Mangistauenergomunai LLP demand in the market. oil service companies consider their leading role processing plant in the area. introduced a dispatch control system and an automated system in maintaining social stability in operating regions. of electric power technical record-keeping at the Kalamkas OIL PRODUCTS PRODUCTION (NET TO KMG), THOUS. TONNES This inevitably leads to extra costs, resulting JSC KazMunayGas and Linde Aktiengesellschaft (Linde and Zhetybai fields while ensuring uninterrupted operation from the need to retain employees regardless AG), a German multinational chemical company, signed of a gas turbine electric power plant at the Kalamkas field a Memorandum of Understanding to cooperate in production, equipped with unique innovative technology. The company 2019 6,172 442 6,614 of current operational needs and meet all obligations under the collective bargaining agreement: benefits, technology transfer, training and sharing experience in natural also produces asynchronous electric motors up to 10 kW and associated gas utilisation and processing in Kazakhstan. and conducts energy audits and then provides energy services. 2018 5,788 397 6,185 medical insurance premiums, and upskilling costs. The number of employees decreases through natural Based on the Memorandum, the two parties are discussing 2017 5,530 365 5,895 turnover. potential cooperation to build a gas processing plant KMG Drilling&Services and the Caspian Drilling Company in Zhanaozen. Work is being undertaken to develop a pre- signed a trusteeship agreement to transfer the Satti jack-up Petromidia feasibility study, and agree the project parameters, as well drilling rig to the Caspian Drilling Company for modification Vega as the terms of joint operation. and further operation on subsoil use projects within

SERVICE INFRASTRUCTURE the Azerbaijan sector of the Caspian Sea. Modification Petromidia’s refining margin, calculated as the difference Munaitelecom LLP started to produce, sell and install low- is in progress, with the start of operation expected before between the Urals prices and prices for refined oil products KMG’s oil service operations are supported by 14 key voltage control cabinets and ultrasonic flowmeters for high- the end of 2020. (petrol, diesel fuel, naphtha, liquefied petroleum gas, jet fuel, companies. pressure liquids. It also arranged on-the-job training for KMG fuel oil, propylene, sulphur, and oil coke), was USD 4.2 per Group using VR technologies. Work is underway to integrate The modified jack-up drilling rig will have increased barrel in 2019, which is USD 2 per barrel lower year-on-year • Drilling and developing oil and gas wells. Providing out well companies in the Mangystau Region into a single network lifting capacity, additional equipment and more spacious (reflecting the global oil prices). services and workovers for secure data sharing. The company received industrial living quarters to allow safe and high-performance well • Transporting freight and passengers, providing field certification for this business. drilling to depths of over 6,000 m. This will also improve Petromidia refining margin transportation and maintenance the competitiveness of the rig in the drilling services market • Providing maintenance, repair, set-up and testing services Oil Services Company LLP has piloted a lean production of the Caspian Sea and allow us to participate in many offshore 2017 2018 2019 for electrical installations and cathode protection; project, with the aim of increasing the company’s financial projects in Azerbaijan, Turkmenistan, and Kazakhstan. commissioning and routine servicing of electrical equipment stability and creating a positive and highly productive work Petromidia refining margin, 48.8 47.4 31.7 USD per tonne • Operating offshore and onshore drilling rigs, oil and gas environment. The company is rolling out tablets and Wellreport Support Service Vehicles and Well Servicing Division LLP production engineering, drilling services software to create a single database of wells, automate daily signed a new three-year contract with TOTAL to provide well Petromidia refining margin, 6.4 6.2 4.2 • Natural gas processing reports and collect and store data on drilling crew activities, well services at the Dunga field with the option to extend for up USD per barrel1 • Servicing measuring equipment, automation systems workovers and services. In addition, the company is revamping to two years. and telemechanics, providing telecoms, radio, and cable and upgrading hoist units and drilling rigs to ensure In 2019, crude oil volumes for resale marketed through KMG or satellite TV services at oil fields; checking and repairing uninterrupted and safe well drilling and servicing. TenizService LLP fully completed the construction International’s trading operations totalled 10.9 mln tonnes. measuring equipment; and servicing security alarms. and installation operations and commissioned the final stage Servicing transport GPS monitoring systems Oil Construction Company LLP has registered in ALASH, facilities of the Cargo Transportation Route Project intended CRUDE OIL FOR RESALE, THOUS. TONNES • Building steel and fiberglass pipelines for oil transportation, a unified vendor database to manage interactions between to receive, tranship and transport cargo for the Future Growth building gas pipelines and constructing oil and injection wells. suppliers and operators in Kazakhstan (Karachaganak Project at the Tengiz field. During 2018–2019, 322 outsized Reconstructing oil pipelines, water pipelines and roads Petroleum Operating B.V., North Caspian Operating cargoes with a total weight of about 182 thous. tonnes were 2019 5,0 10,911 • Producing and transporting drinking water, ensuring sea Company N.V.). This will expand the geography of its services. transshipped. 2018 4,2 12,535 water transport The company also implemented a project management • Catering, maintaining social facilities, etc. framework and plans to introduce cost-control, working 2017 11,786 to expand its business in constructing new tanks.

KMG INTERNATIONAL’S RETAIL NETWORK

At the end of 2019, KMG International’s retail network consisted of 271 gas stations and 693 points of sales across Romania, and 244 gas stations and points of sales elsewhere.

• Romania: 271 gas stations and 693 points of sales (DOEX, RBI and Cuves). The share of the retail market is 16% • Neighboring countries: 244 gas stations and points of sales. Bulgaria – 56 (retail market share 3%), Georgia – 101 (market share 19.5%), Moldova – 87 DOCO gas stations (market share 24%).

Retail sales (retail and trading) of oil products produced by KMG International increased by 5.5% year-on-year to 3,450 thous. tonnes driven by an increase in the sales of diesel fuel (+ 13%), petrol (+ 11%), and jet fuel (+ 19%).

1. To convert tonnes to bbl a conversion rate of 7.6 was used.

70 71 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

CFO FINANCIAL REVIEW CONSOLIDATED FINANCIAL RESULTS ACCORDING TO IFRS 1 UoM 2019 2018 %

Brent Dated, average $/bbl 64.21 71.31 -10.0%

Exchange rate, average KZT/USD 382.87 345.04 11.0% KMG CREDIT RATINGS Revenue KZT bln 6,859 6,989 -1.9% USD mln 17,915 20,255 -11.6%

In 2018-2019 KMG's financial performance improvement was Share in profit of JVs and associates, net KZT bln 828 697 18.7% translated into higher ratings of the Company's stand-alone credit profile (SACP), from Fitch, Moody's and S&P: USD mln 2,163 2,021 7.0% • In November 2018, S&P Global Ratings upgraded its rating Net profit KZT bln 1,158 694 67.0% on KMG from BB-/kzA to BB/kzA+ with stable outlook and upgraded KMG's stand-alone credit profile to b+; USD mln 3,026 2,010 50.5% • On 28 March 2019, international rating agency Fitch EBITDA2 KZT bln 1,963 1,707 15.0% confirmed its rating at the level “BBB-/Forecast stable”, while increasing the individual rating (stand-alone credit profile) USD mln 5,126 4,947 3.6% from b to bb-; FCF3 KZT bln 592 416 42.4% • On 22 August 2019 rating agency Moody’s affirmed KMG’s long-term rating at Baa3 with the outlook changed USD mln 1,537 1,206 27.5% from “stable” to “positive”, whereas the standalone rating Net debt KZT bln 2,361 2,175 8.6% of KMG has been upgraded from Ba3 to Ba2; • On 27 March 2020, Fitch affirmed its rating at the level “BBB-” USD mln 6,171 5,661 9.0% with a Stable Outlook;

• On 27 March 2020, S&P affirmed its "BB" rating and revised its outlook on KMG to "negative" on the back of lower oil 158 For more details see the Financial Statements section prices.

Despite the ongoing market and geopolitical instability, of short-term bonds into long-term ones, KMG aligned Moody’s S&P Fitch 2019 was a sustainable and resilient year for KMG. the covenants in the documentation for the issuance Baa3 BB BBB- In 2019, we significantly improved our financial indicators, of Eurobonds and systematically reduced the debt level. KMG exceeded a certain production plan and fulfilled a number also refinanced some loans from US dollars to tenge to minimize positive negative stable of strategic tasks set by the Shareholder and the Government the currency risk. In 2019, KMG took all necessary measures of the Republic of Kazakhstan. to fulfill contractual obligations under TCO crude prepayment.

As part of the development strategy, during the last years KMG balanced out its debt portfolio as a result of refinancing

Dauren Karabayev Deputy Chairman of the Management Board – CFO of KMG

1. For reader convenience, amounts in USD were converted at the average exchange rate for the applicable period (average exchange rates for 2019 and 2018 were 382.87 and 345.04 KZT/USD, respectively; period-end exchange rates as at 31 December 2019 and 31 December 2018 were 382.59 and 384.20 KZT/USD, respectively). 2. Starting from 2019, the Company revised calculation approach of Earnings before interest, taxes, depreciation and amortization (EBITDA), excluding the finance income from the methodology. In the reports for 2019, and for further periods, the Company calculates EBITDA as “Revenue + Share in profit of JVs and associates, net – Cost of purchased oil, gas petroleum products and refining costs – G&A expenses – Transportation and selling expenses – Taxes other than income tax. Financial metrics for prior periods were recalculated respectively. 3. Starting from 2019, the Company revised calculation approach of the Free cash flow (FCF), including proceeds from Caspian Pipeline Consortium (CPC) under the “Kazakhstan Note”. The Company calculates FCF as “CFO - TCO prepayments, net – Capex (cash basis) + Proceeds from CPC under the “Kazakhstan Note”. FCF metrics for prior periods were recalculated respectively.

72 73 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

STATEMENT OF PROFIT OR LOSS REVENUE AND OTHER INCOME

KZT mln 2019 2018 Change % During 2019, our revenue decreased by 1.9% year-on-year The earnings from shares in the net profit of joint ventures Revenue and other income to KZT 6,859 bln (USD 17,915 mln). The downtrend was mainly and associates of KMG increased by 18.7% year-on-year to KZT attributable to the decrease in average Brent prices by 10.0% 828 bln (USD 2,163 mln). The increase is mainly the result of a full Revenue 6,858,856 6,988,964 (130,108) -1.9% and the decrease in KMG International’s (KMG I) crude oil sales recovery of accumulated unrecognized shares in the loss of Asia 1 Share in profit of joint ventures and associates, net 827,979 697,326 130,653 18.7% volumes, which was partially offset by increased gas exports Gas Pipeline LLP to the amount of KZT 168 bln (USD 439 mln). to China and tenge depreciation against US Dollar by 11.0%. Finance income 240,880 161,027 79,853 49.6% The crude oil sales of KMG I decreased by 13.2% year-on-year Finance income for 2019 increased by 49.6% year-on-year to KZT 1,567 bln (USD 4,092 mln). Gas export increased by 22.9% to KZT 241 bln (USD 629 mln). The increase was mainly driven Gain on sale of subsidiaries 17,481 18,359 (878) -4.8% and amounted to KZT 674 bln (USD 1,761 mln). by derecognition of loans from partners of the Pearls project Other operating income 24,936 23,035 1,901 8.3% for the total amount of KZT 111 bln (around USD 290 mln) due to the partners’ decision to voluntarily relinquish the contract Total revenue and other income 7,970,132 7,888,711 81,421 1.0% area under the Pearls PSA. Total revenue and other income, USD mln 20,817 22,863 (2,046) -8.9%

Costs and expenses

Cost of purchased oil, gas, petroleum products and other (3,913,744) (4,312,958) 399,214 -9.3% materials COSTS AND EXPENSES Production expenses (721,693) (604,475) (117,218) 19.4%

Taxes other than income tax (454,295) (477,732) 23,437 -4.9% The cost of purchased oil, gas, petroleum products and refining Transportation and selling expenses for 2019 were up by 13.4% Depreciation, depletion and amortization (337,424) (285,186) (52,238) 18.3% costs amounted to KZT 3,914 bln (USD 10,222 mln), reflecting year-on-year to KZT 420 bln (USD 1,098 mln) mostly due Transportation and selling expenses (420,402) (370,777) (49,625) 13.4% a decrease of 9.3% year-on-year due to lower cost of purchased to an increase of gas export volumes to China. crude oil and the lower global oil prices partially offset by increase General and administrative expenses (213,967) (213,485) (482) 0.2% in gas purchase volumes and tenge depreciation against US General and administrative expenses were almost stable year- Impairment of property, plant and equipment, intangible (207,819) (165,522) (42,297) 25.6% Dollar. Crude oil purchases decreased by 6.1% year-on-year to KZT on-year and amounted to KZT 214 bln (USD 559 mln). In 2019, assets, exploration and evaluation assets 2,448 bln (USD 6,395 mln). KTG’s cost of purchased gas increased KMG recognized a provision in the amount of KZT 34 bln (USD 90 Other expenses (7,203) (23,283) 16,080 -69.1% by 53.3% year-on-year and amounted to KZT 473 bln (USD 1,235 mln) related to litigation issues between KMG Drilling & Services mln). and the Consortium of companies Ersai Caspian Contractor LLP Finance costs (317,433) (427,655) 110,222 -25.8% and Caspian Offshore and Marine Construction LLP on the issues Net foreign exchange gain/(loss) 8,479 (38,320) 46,799 -122.1% Production expenses amounted to KZT 722 bln (USD 1,885 mln), arising from the contract for the purchase of integrated works reflecting an increase of 19.4% year-on-year due to increase on construction of a jack-up floating drilling rig. Total costs and expenses (6,585,501) (6,919,393) 333,892 -4.8% of salary expenses, repair and maintenance and the lease Total costs and expenses, USD mln (17,201) (20,054) 2,853 -14.2% expenses. Salary expenses for production employees for 2019 Finance costs were down by 25.8% year-on-year and amounted were up by 15.9% year-on-year and amounted to KZT 338 to KZT 317 bln (USD 829 mln) due to recognized interest Profit before income tax 1,384,631 969,318 415,313 42.8% bln (USD 883 mln) due to the salary indexation by around 7% for the early redemption of Eurobonds in 2018. for the employees at KMG-operated assets and KTG. Repair Income tax expenses (226,180) (279,260) 53,080 -19.0% and maintenance costs for 2019 amounted to KZT 129 bln (USD For more details see the Financial Statements section Profit for the year from continuing operations 1,158,451 690,058 468,393 67.9% 338 mln), reflecting an increase of 31.5% year-on-year explained by the workover of the wells at oilfields of the Ozenmunaigas JSC Discontinued operations and Embamunaigas JSC, scheduled overhauls at Karachaganak Profit/(loss) after income tax for the year from discontinued 6 3,453 (3,447) -99.8% mega projects and the service maintenance of processing operations equipment at the Atyrau refinery (ANPZ). Increase of the lease Net profit for the year 1,158,457 693,511 464,946 67.0% expenses can be explained by attraction of third-party ship- owners for providing oil transportation services in accordance Net profit for the year, USD mln 3,026 2,010 1,016 50.5% with the agreement on oil transportation between Kazmortransflot (KMTF), KMG and KMG I.

1. AGP is a joint company of KazTransGas JSC (100% KMG subsidiary) and Trans-Asia Gas Pipeline Company Limited (shareholder – CNODC, CNPC subsidiary).

74 75 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

We analyzed segmented information according to IFRS. Key factors affecting segmented EBITDA in 2019: PROFIT Segment performance is evaluated based on revenues and net profit. • Upstream operations reflected decrease of USD 385 mln mainly due to lower earnings from JVs and associates Net profit increased by 67.0% year-on-year and equaled KZT increased gas exports to China, a finance income increase Group’s operating segments have their own structure on the back of lower global oil prices; 1,158 bln (USD 3,026 mln). The growth is explained by full and a decrease of finance costs for 2019. and management according to the type of the produced goods • Oil Transportation segment was relatively stable recovery of accumulated unrecognized shares in the loss of AGP, and services provided. Moreover, all segments are strategic over the year; directions of the business, which offer different types • EBITDA from “Gas transportation and marketing” segment of the goods and services in different markets. soared by USD 330 mln mainly as a result of full recovery of accumulated unrecognized shares in the loss of Asian Gas EBITDA structure The Company’s activity consist of four main operating Pipeline (AGP); segments: exploration and production of oil and gas, oil • Refining segment EBITDA decreased slightly due to tenge transportation, gas trading and transportation, refining, KMG depreciation against USD; UoM 2019 2018 % International, Sales of crude oil and refined products to third • EBITDA from Corporate office’s trading operations up USD Exploration and production KZT bln 963 1,000 -4% parties, Corporate center of NC KMG and other (oilfield service 116 mln as a result of transfer of KMG EP’s oil processing USD mln 2,515 2,900 -13% companies and other insignificant companies). KMG presents activities (from OMG and EMG) from KMG EP to NC KMG Corporate center's activities separately, since NC KMG performs following KMG EP’s delisting in 2018. KMG EP transferred 1 % of EBITDA 49% 59% -10pp not only the functions of the parent company, but also carries its activities on processing crude oil at Atyrau and Pavlodar Oil transportation KZT bln 219 184 19% out operational activities (processing of crude oil at Atyrau refineries and further sale of oil products to both domestic and Pavlodar refineries and further sale of oil products to both and export markets. In addition, KMG Onimderi ceased USD mln 572 533 7% domestic and export markets). its operations during 2Q of 2019, therefore the wholesale % of EBITDA 11% 11% 0pp and retail sales now are combined by NC KMG.

Gas trading and transportation (KTG) KZT bln 458 299 53%

USD mln 1,196 866 38% up 15% % of EBITDA 23% 17% 6pp EBITDA Refining KZT bln 189 181 4%

USD mln 494 525 -6% CASH FLOWS

% of EBITDA 10% 11% -1pp The following table below provides our consolidated cash flows for 2018 and 2019: KMG International KZT bln 81 71 14% USD mln 213 206 3% KZT mln 2019 2018 Change % % of EBITDA 4% 4% 0pp Net cash flow from operating activities 123,801 629,161 (505,360) -80.3%

Trading KZT bln -2 3 -167% Adjusted cash flows from operating activities 988,251 801,113 187,138 23.4%

USD mln -7 7 -200% Net cash flows (used in)/ from investing activities (319,562) 991,081 (1,310,643) -132.2%

% of EBITDA 0% 0% 0pp Net cash flows (used in)/from financing activities (270,371) (1,520,368) 1,249,997 -82.2%

Corporate center (trading) KZT bln 78 31 152% Effects of exchange rate changes (14,985) 179,467 (194,452) -108.3%

USD mln 206 90 129% Change in allowance for expected credit losses (279) (98) (181) 184.7%

% of EBITDA 4% 2% 2pp Net change in cash and cash equivalents (481,396) 279,243 (760,639) -272.4%

Corporate center (adm.) KZT bln -36 -24 50% Net change in cash and cash equivalents, USD mln (1,257) 809 (2,067) -255.4% USD mln -95 -70 36%

% of EBITDA -2% -2% 0pp

2 Other KZT bln 13 -38 -134% up 42.4% USD mln 32 -119 -127% FCF % of EBITDA 0% -2% 2pp

EBITDA KZT bln 1,963 1,707 15%

USD mln 5,126 4,947 4%

1. EBITDA in Tenge. 2. Include eliminations, which are represents exclusion of intra-group turnovers. Inter-segment transactions were made on terms agreed to between the segments that may not necessarily be at market rates, except for certain regulated services, which are provided based on the tariffs available to related and third parties.

76 77 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

CASH MOVEMENT, USD MLN STATEMENT OF FINANCIAL POSITION

124 2,573 KZT mln 2019 2018 Change % 330 Full settlement of TCO Dividends from crude oil prepayments in advance Assets JVs and associates -1,160 Property, plant and equipment 4,484,271 4,515,170 (30,899) -0.7%

4,024 Investments in joint ventures and associates 5,590,384 4,895,444 694,940 14.2% Long-term bank deposits 52,526 52,297 229 0.4% 35 2,782 -2,250 Other non-current assets 1,314,823 1,285,418 29,405 2.3% -452 -112 Short- term bank deposits 359,504 386,459 (26,955) -7.0%

Cash and cash equivalents 1,064,452 1,539,453 (475,001) -30.9%

Other current assets 1,208,351 1,279,279 (70,928) -5.5%

14,074,311 13,953,520 120,791 0.9% Cash 31-Dec-2018 CFO adj to TCO Inflows from CPC Cash capex TCO prepayments Debt proceeds Dividends paid Other Cash 31-Dec-2019 prepayments under the settlement and settlements, to Shareholder Assets classified as held for sale 7,604 61,760 (54,156) -87.7% settlement ‘Kazakhstan Note’ net TOTAL ASSETS 14,081,915 14,015,280 66,635 0.5% Free Cash Flow = USD 1,537 mln TOTAL ASSETS, USD mln 36,807 36,479 328 0.9%

Equity and liabilities TOTAL EQUITY 8,196,656 7,143,069 1,053,587 14.7%

TOTAL EQUITY, USD mln 21,424 18,592 2,832 15.2% Non-current borrowings 3,584,076 3,822,648 (238,572) -6.2% DIVIDENDS RECEIVED Other non-current liabilities 862,741 1,241,408 (378,667) -30.5% CAPITAL EXPENDITURES Current borrowings 253,428 330,590 (77,162) -23.3%

Other current liabilities 1,185,014 1,472,526 (287,512) -19.5% Company’s Capital expenditures decreased by 19.5% year- The Company is a Parent Company of the Group and receives on-year to KZT 505 bln (USD 1,320 mln). Capital expenditures dividends from their subsidiaries, JVs and associated companies. 5,885,259 6,867,172 (981,913) -14.3% represents investments in projects, maintaining current We received dividends in the amount of USD 330 mln and USD Liabilities directly associated with the assets classified as held - 5,039 (5,039) -100.0% production levels and other expenses. 464 mln in 2019 and 2018, respectively. The decrease was mainly for sale attributable to – received dividends from TCO and KazRosGas TOTAL LIABILITIES 5,885,259 6,872,211 (986,952) -14.4% Complex modernisation of refineries has been completed, in 2018. TOTAL LIABILITIES, USD mln 15,383 17,887 (2,504) -14.0% bringing fuels production of Euro-4 and Euro-5 standards and we are already exporting oil products to Europe and Central TOTAL EQUITY AND LIABILITIES 14,081,915 14,015,280 66,635 0.5% In 2019, we paid dividends in the amount Asia. Main investments by segments are: Production - 51%, TOTAL EQUITY AND LIABILITIES, USD mln 36,807 36,479 328 0.9% Transportation - 27%, Refining - 16%, Other – 6%. of KZT 43 bln to the Fund, the National Bank of RK and other non-controlling interests

CAPEX ON ACCRUED BASIS, USD MLN DIVIDENDS RECEIVED FROM JVS AND ASSOCIATED COMPANIES, USD MLN STRATEGIC OBJECTIVE: STRENGTHEN FINANCIAL STABILITY

KMG’s gross debt is represented by Bonds and Loans. The debt DEBT MATURITY PROFILE (NOMINAL), USD MLN 2019 671 357 208 85 1,320 2019 79 39 24 162 27 330 portfolio is mainly formed in US dollars - the currency of major incomes. Accordingly, the “organic” hedging of currency risk 1,819 2018 522 643 590 65 1,820 2018 124 72 17 188 63 464 is achieved without the need of using derivative financial instruments. As part of the development strategy, the Company 1,500 took a number of measures to strengthen financial stability: 1,250 1,250 Upstream Downstream KGM Tengiz 1,033 Midstream Other Petrokazakhstan Inc MMG • smoothed the debt maturity profile of KMG's debt 850 Kazakhoil Aktobe Others 752 by refinancing of short-term bonds into long-term ones; 621 527 • aligned the covenants in the documentation for the issuance 308 of Eurobonds; 166 • systematically reduced the debt level, including the advance settlement of obligations pursuant to TCO Oil Sale 2020 2021 2022 2023 2024 2025 2026 2027 2030 2047 2048 Transaction; • to minimize the currency risk, KMG refinanced some loans Bonds Loans from US dollars to tenge.

78 79 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

MEASURES TAKEN AS PART OF DEBT MANAGEMENT

In 2018, the Company successfully placed 7-year, 12-year Also in July 2019, Atyrau Refinery transferred the loan currency and 30.5-year issues of Eurobonds as part of managing its to DBK in the amount equivalent to USD 152 mln, from “USD” portfolio of obligations. The purpose of the new Eurobond to "KZT" order to manage currency risk. Additionally, issue is to refinance upcoming liabilities and manage the debt in December 2019, the Atyrau Refinery entered into a loan structure. Thanks to refinancing of Eurobonds in the amount agreement with DBK for the amount equivalent to USD 200 mln. of USD 3.25 bln in 2018, it was possible to achieve a more The funds in the amount of USD 87 mln were spent on financing balanced schedule of repayment of obligations and changes the oil and processing plant modernization and it is also in a number of restrictive conditions on the part of lenders, planned to use the funds to partially refinance the foreign the so-called covenants. currency debt of the plant at Exim Bank of China in January 2020 in the amount of USD 110 mln. Total debt as of December 31, 2019 decreased by KZT 316 bln (USD 780 mln) or 7.6% compared with the figure as of December On November 30, 2019, the Company ahead of schedule fulfilled 31, 2018 and amounted to KZT 3,838 bln (USD 10,030 mln). its contractual obligation to return the advance payment as part The decrease in total debt is due to: of the TCO1 oil and liquefied petroleum gas advance transaction • writing off a loan from partners of the Pearl project in the total from the international trading company Vitol and the syndicate amount of KZT 111 bln (USD 290 mln); of international banks. In general, in 2019 KMG its debt mainly • a decrease in debt at the Atyrau Refinery in the amount due to the accelerated settlement of TCO preypayment facilities of KZT 62 bln (about USD 163 mln); in the amount of USD 2,250 mln, inlcuding USD 1,250 mln ahead • In March 2019, KMG received the consent of the holders of the schedule. of Eurobonds due for redemption in 2022, 2023, 2027, 2047. (Eurobonds issued before 2018) to align the covenant The cash and cash equivalents balance as of 31 December package with the terms of the 2018 Eurobond issue and early 2019 including cash in deposits decreased by 25.4% redemption of Eurobonds in the amount of USD 30.1 mln to KZT 1,476 bln (USD 3,859 mln), mainly due to the cash (KZT 11.6 bln) due to be paid in 2044; utilization for the acceleration of a prepayments settlement • repayment of DBK bonds in the amount of KZT 40.5 bln pursuant to the TCO Advanced Oil Sale trnsaction (USD 1,250 (about USD 113 mln) and a decrease in borrowings of KMG mln settlement ahead of the schedule). I in the amount of KZT 32 bln (USD 83 mln). SUSTAINABILITY MANAGEMENT As a result of the above, KMG’s net debt as of 31 December 2019 amounted to KZT 2,361 bln (USD 6,171 mln) reflecting an increase of 8.6% compared to KZT 2,175 bln (USD 5,661 mln) as of 31 December 2018. - 7.6% reduction in total debt USD 2.25 bln accelerated settlement of TCO preypayment facilities in 2019 We embrace sustainability and work towards embedding it throughout our entire value chain. KMG is also striving MANAGEMENT SYSTEM to meet the highest safety and corporate governance DEBT MOVEMENT, USD MLN DEBT AND LEVERAGE, USD MLN standards. Our Development Strategy until 2028 relies on continuous improvement of the system of governance To ensure transparency of its activities for stakeholders, KMG that promotes better corporate social responsibility, health, publishes annual Sustainability Reports. KMG’s sustainability 10,810 (163) (83) (136) (290) 10,030 safety and environmental protection; enhances regional reporting is guided by the Global Reporting Initiative’s (GRI) (49) (59) 10,030 economic impact and anti-corruption efforts; better relations Standards. 7,323 31-Dec-2019 3,859 with stakeholders; and improves corporate governance, 7,297 corporate culture, corporate ethics, and compliance ratings. 6,171 KMG’s corporate social responsibility policy fosters KMG’s Sustainability Report is available on the Company's development across our operating regions. We promote website 3,487 2,733 10,810 meritocracy, fairness, and integrity while providing every employee with a workplace conducive to new achievements Debt Atyrau KMG Bonds 1 KMT KTG Other Debt 31-Dec-2018 5,149 and assessing their respective contributions to KMG’s 31- refinery International repayment write-off 31- Dec- Dec- overall success based on merit. We also foster a culture 5,661 2018 2019 of understanding, engagement, and support among Bonds Loans our employees at all levels. Debt Cash and deposits Net Debt

1. For reader convenience, amounts in USD were converted at the average exchange rate for the applicable period (average exchange rate for 2019 was 382.87 KZT/USD). 2. In 2016, KMG entered into a long-term TCO crude oil and liquefied petroleum gas (LPG) supply agreement, which included the prepayment. The total minimum delivery volume approximates 38 mln tonnes of crude oil and 1 mln tonne of LPG in the period from the date of the contract to June and August 2021, respectively.

80 81 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

ACTIVITIES TO IMPLEMENT THE UN SUSTAINABLE DEVELOPMENT GOALS (SDGs) HEALTH, SAFETY AND ENVIRONMENT MANAGEMENT SYSTEM (HSE MS)

KMG’s health, safety and environment management system compliant with ISO 9001, ISO 14001, and OHSAS 18001. is designed to global best practices and the guidelines KMG’s significant energy users are certified to ISO 50001. of the International Association of Oil & Gas Producers (IOGP), The effectiveness of our management systems is verified ISO 14000, and ISO 45001. The System covers ten areas by independent auditors on a regular basis. and relies on four pillars: leadership, goal achievement, risk management and continuous improvement. To improve their occupational safety management, KMG Group subsidiaries have plans to certify their occupational health Since 2006, all our subsidiaries operate a quality, environmental, and safety management systems to ISO 45001:2018 (replacing and occupational health and safety management system OHSAS 18001:2007) by 2021.

HSE MS STRUCTURE AND IMPLEMENTATION OF INDUSTRY BEST PRACTICES

INTERNAL CONTROL AND LEADERSHIP IMPROVEMENTS Leadership commitment: HSE assessment management leadership forums, SPE system1 Three tiers of HSE committees HSE committee system HSE Compliance and RT Audits HSE awareness efforts GOALS Validation and Leadership, ZERO: improvements commitment, incidents and responsibility spills discharges Monitoring, Policy, routine flaring Goal 3. Ensure healthy lives and promote well-being for all at all measurement, objectives, and In 2015, Kazakhstan ratified the UN Sustainable Development and analysis programmes Goals (SDGs) and incorporated them into the Kazakhstan–2025 ages, MONITORING Continuous Goal STRATEGY HSE reporting rules and the Kazakhstan–2050 strategies. Since the Government improvement achievement Safety at work HSE road safety automation of Kazakhstan is responsible for setting priorities Reporting and Organisation, Environmental responsibility Goal 6. Ensure availability and sustainable management HSE KPI framework incident Health, resources, and for and the implementation of the respective SDGs, national Incident investigation process investigation Safety and capabilities of water and sanitation for all, Automated accident investigation Environment SDG implementation plans have been adopted. Achieving these module targets will require large-scale cooperation and joint efforts Benchmarking Risk POLICIES management Leadership with businesses and the civil society. Execution of Contractors and HSE policy Goal 7. Ensure access to affordable, reliable, sustainable program and stakeholders Transport policy Alcohol policy and modern energy for all, safe KMG joined the UN Global Compact (UNGC) in 2006 and has operation Emissions policy been an active member since then, reiterating its commitment to the UNGC’s ten principles for sustainable development Asset design and Risk management integrity and the United Nations’ 17 SDGs. Goal 8. Promote sustained, inclusive and sustainable economic STANDARDS growth, full and productive employment and decent work for all, Developing and implementing HSE EXECUTION standards in line with global best practices Health management system Transport safety programme The Company’s annual Sustainability Report also serves Goal 9. Build resilient infrastructure, promote inclusive as our Communication on Progress for the UN Global Crisis management standard and sustainable industrialization and foster innovation, Methane leak detection Compact and is available on the UNGC website at: ASSET INTEGRITY RISK MANAGEMENT STAKEHOLDERS www.unglobalcompact.org/what-is-gc/participants/6810. programme Waste management standard Fire preparedness Risk management system Contractor standard Water management standard LOTO Behavior-based safety programme Contractor reporting Energy efficiency roadmap Process safety management EIA (Environmental Impact Public hearings Goal 12. Ensure sustainable consumption and production system Assessment) standard patterns, KMG contributes to all the UN SDGs, but some are more relevant than others in terms of risks and business impact. Here we highlight several of the SDGs: Goal 13. Take urgent action to combat climate change and its impacts, * HSE - Health, Safety and Environment

Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss.

82 83 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

The Company has in place a 3-tier HSE management system: In 2019, the Company updated its risk register, adding risks • At the level of KMG’s Board of Directors related to climate change and water shortages. The KMG ENVIRONMENTAL RESPONSIBILITY AND SAFETY • Health, Safety and Environment Committee at KMG’s Corporate Centre conducts regular reviews of environmental Management Board level protection metrics, comparing them with the historical • HSE committees at subsidiaries performance and global industry benchmarks (IOGP, IPIECA), 2019 HIGHLIGHTS ENVIRONMENTAL PERFORMANCE INDICATORS, TONNES PER 1,000 TONNES along with audits of production facilities. Regular inspections OF PRODUCED HYDROCARBONS 1 2 In 2019, the Health, Safety and Environment Committee was of production facilities for compliance with legal requirements 1. SOX emissions intensity – 0.20 (IOGP – 0.2 ) 0.20 0.21 launched at the Fund. are also conducted at the corporate level, informing preventive 2. NOX emissions intensity – 0.21 (IOGP – 0.37) measures to improve performance. 3. Associated petroleum gas (APG) flaring rate – 2.95 2019 2.95 Safety, health and environmental protection reports (IOGP – 10.53) 0.25 0.20 2018 6 are presented monthly at the meetings of KMG’s Board 4. APG utilisation rate: 97% 0.32 0.25 of Directors, and detailed, informative reports are presented 5. Historical waste and oil contaminated soils treatment: 325 2017 11 at the meetings of the Health, Safety, Environment thous. tonnes (target: 325 thous. tonnes) 0.39 0.24 and Sustainable Development Committee of the Board 6. Reduction in energy consumption (against a 2016 2016 12 of Directors. baseline) – 0.7% 7. CDP score: C SOX emissions intensity

NOX emissions intensity APG flaring rate MANAGEMENT MOTIVATION SYSTEM CONTRACTOR MANAGEMENT

To increase motivation and accountability for HSE compliance, The Company’s strong capabilities in selection and management APG UTILISATION RATE, % the Company included the Corporate Governance Score into of contractors give us a critical competitive advantage. the list of its corporate-level KPIs for 2019, and developed Contractors account for over 50% of our blue-collar workers, 97 the following list of environmental and social responsibility KPIs and improvements to their safety eventually affect KMG’s 2019 for top managers: overall productivity. The Company seeks to improve its selection 2018 93 criteria for potential contractors in order to ensure high-quality execution and full transparency on the entire service cycle. Environmental and social responsibility KPIs 2017 85 KMG Group Corporate Standard on Engaging Contractors 2016 Environmental HSE Managing Director – Reduced Rate 86 responsibility of Associated Petroleum Gas Flaring. on HSE is a structural element of the Management System HSE Co-Managing Director – Reduced comprising requirements for agreements with contractors, Energy Consumption. including the HSE Agreement on compliance with, and penalties HSE Managing Director and HSE for violation of, HSE requirements, as well as HSE-based pre- The Company’s goals in HSE management are directly related In 2015, KMG supported the World Bank’s GGFR initiative Co-Managing Director – Achieving Zero mobilisation preparedness audit of contractors’ machinery, to its Development Strategy. KMG’s Development Strategy to eliminate routine APG flaring by 2030. KMG’s Emissions Historical Oil Waste. equipment, and staff. The Company also holds regular forums until 2028 covers strategic initiatives to promote greater Management Policy was approved in 2019 as part Social Managing Director for Human Resources – and meetings with potential service providers to discuss future environmental responsibility. The Company’s environmental of this initiative. The Policy is aimed at complete elimination responsibility Social Responsibility. Managing Director for Safety – Safety joint partnerships and HSE requirements of KMG. priorities include management of greenhouse gas emissions, of routine flaring and is comprised of eight key principles, six Management at Contracting Organisations. water resources and production waste, flaring reduction, land of which directly address climate change. Contracting Organisations’ Reporting On 2 October 2019, Aktau hosted our Forum on Technologies reclamation, and energy efficiency improvement. Transparency. for Management and Recycling of KMG’s Historical Waste. KMG Group also implements the Road Map to Improve A total of over 30 companies providing similar services took In 2019, the Company approved its Environmental Policy Occupational and Environmental Safety at KMG until 2020 which The Company also approved using KMG’s ESG rating part in the Forum. The Forum brought together Kazakhstan’s as prioritised by the Development Strategy. KMG and its includes its main strategic environmental and sustainability as a corporate KPI for 2020. operators providing oil waste recycling/management subsidiaries take a zero tolerance approach to environmental initiatives. Every year the Company builds new recycling services to raise their awareness on the requirements harm caused by pollution. For the first time, the Environmental facilities, retrofits existing plants, and invests in new pipelines for quality, scope, and timelines for providing similar services Policy covers such environmental aspects as climate, and infrastructure, e.g. construction of central gas processing with respect to KMG’s historical waste and help them evaluate biodiversity, compulsory additional evaluation of risks related facilities, the Saryarka trunk gas pipeline, etc. over 50% their capabilities for adopting new technology. to operations in ecologically valuable areas, compulsory share of contractors reclamation of polluted lands, and ensuring pipeline integrity. The Forum also discussed KMG’s category procurement management strategy, Waste Management (Historical Waste), which will serve as the platform for procuring services to address historical pollution and remediate oil contaminated soils.

1. Previously published figures contained in the Company’s press releases were calculated based on preliminary data. 2. Available data on the International Association of Oil & Gas Producers (IOGP) performance indicators for 2017 (https://www.iogp.org/). 3. Available data on the International Association of Oil & Gas Producers (IOGP) performance indicators for 2018 (https://www.iogp.org/).

84 85 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

PRIORITY ENVIRONMENTAL PROJECTS

1. Elimination of historical pollution, as well as sources As part of the NAMA Facility climate change mitigation ENERGY SAVING AND ENERGY EFFICIENCY PROGRAMMES of negative environmental impact (idle wells, wastewater project, KazTransGas Onimderi LLP (KTGO) intends to further reservoirs, landfills and other production facilities) increase the proportion of gas-powered motor vehicles 2. Reduction in emissions through improved technology and specialised machinery in its fleet within the initiative solutions, e.g. replacing fuel oil with fuel gas/natural gas used to convert it from traditional fuels (petrol and diesel fuel) as fuel in process furnaces, using next-generation additives, to CNG (fleet upgrade). Following the fleet upgrade between KMG considers ongoing efforts to enhance energy efficiency self-generated energy amounted tree planting and land improvement at production facilities, 2020 and 2024, the share of gas-powered vehicles (at least a high priority in environmental protection and operational to 642.8 mln kWh in electricity replacing equipment, expanding gas processing capacity, Euro-3 standard) is expected to reach 35%. Improving the fuel efficiency improvements. The KMG Corporate Centre collects and 3,850.6 thous. Gcal in heat installation of gas processing units, etc. mix and vehicle standard by upgrading (purchasing) 16 new and analyses energy consumption and energy efficiency- 3. Reduction in discharges: the Tazalyq Project – wastewater LPG-powered vehicles and 46 new CNG-powered vehicles will related data, monitors the dynamics, identifies opportunities treatment facilities upgrade at Atyrau Refinery significantly reduce transport emissions at KTGO. While in 2018 for improvement, and conducts year-on-year and peer and reclamation of the Tukhlaya Balka evaporation fields transport emissions totaled 17,962 tonnes, in 2024 following benchmarking. In 2019, KMG Group’s specific fuel and energy consumption 4. Cooling tower overhaul to increase the volume of fresh the implementation of the planned measures requiring in the upstream sector averaged at 2.4 GJ per one tonne process water by 3 thous. m³; treatment efficiency about KZT 600 mln over five years, these emissions may be KMG’s energy saving and energy efficiency efforts are based of hydrocarbons produced, still 60% above the International improvement at treatment facilities. reduced to 17,144 tonnes per year or by 4.6%. on the methodology set out in ISO 50001 Energy management Association of Oil & Gas Producers (IOGP) average for 2017, systems, an internationally recognised best-practice framework i.e. 1.5 GJ per one tonne of hydrocarbons produced. In oil for systemic energy management. production, specific energy consumption increase was primarily due to a higher water cut at mature fields, which means EMPLOYEE TRAINING IN ENVIRONMENTAL - 4.6% Since 2017, KMG has had in place a roadmap for KMG a higher density of the fluid produced and, accordingly, a higher target level of reduction in emissions subsidiaries, including jointly controlled entities and joint energy consumption for artificial lift. MANAGEMENT of harmful substances by 2024 ventures, to save energy and improve energy efficiency in 2017– 2020. Objectives set out in KMG’s energy saving roadmap: KMG Group’s key strategic energy saving and energy efficiency The steadily improving performance suggests that the need Employee training expenses initiatives include process equipment upgrades, deployment for HSE training at KMG Group remains strong. Given 1. Increasing senior management’s accountability, introducing of energy saving technologies, optimisation of heat generation the specifics of Kazakhstan’s oil and gas sector, as well 2017 2018 2019 energy efficiency KPIs for managers responsible for energy and consumption, and development of the Group’s own as statutory requirements to mandatory staff education, saving and energy efficiency generation assets including APG-fired generation. Employees trained 61,140 114,971 130,615 training and upskilling, occupational health and safety, 2. Promoting efficient use of energy and industrial and fire safety are priority training areas. Amount in KZT thous. 624,811 1,097,877 1,179,877 3. Reducing energy payments by enhancing energy efficiency In 2019, 69 energy saving and energy efficiency initiatives were and energy saving efforts implemented. Target annual fuel and energy savings amounted In 2019, KMG spent a total of KZT 1,179,877 thous. to train 4. Ensuring energy efficiency in procurement of power to 0.8 mln GJ, which in physical terms corresponds to 11.3 mln 130,615 employees. Under the “70/20/10 – on-the-job training/ equipment manufacturing, retrofit and overhaul services kWh of electricity, 91.3 thous. Gcal of heat and 8,508 thous. m³ internal training/external training” model rolled out across KMG 5. Raising private investments to improve energy efficiency, of natural gas. Group, occupational health and safety and industrial and fire NUMBER OF HSE TRAINED EMPLOYEES BY BUSINESS SEGMENTS IN 2019 including by entering into energy service contracts safety trainings are conducted at KMG’s existing six training 6. Improving energy efficiency compliance controls facilities/centres. 7. Ensuring compliance with statutory energy saving ENERGY CONSUMPTION IN 2019 BY RESOURCE TYPE, % 33,487 Service 1 179 877 8,031 Downstream and energy efficiency requirements Ozenmunaigas JSC (Zhanaozen), KazTransOil JSC (Aktau), 27,931 Midstream 48% Natural gas1 179 877 Intergas Central Asia JSC (Atyrau, Shymkent), Pavlodar Oil 61,088 Upstream ENERGY CONSUMPTION 15% APG Chemistry Refinery LLP (Pavlodar) and Oil Services Company 78 KMG Corporate Centre In 2019, total energy consumption amounted to 182.8 mln GJ, 12% Boiler and heating fuel LLP (Aktau) have their own training facilities/centres. up 9% year-on-year, including 12.7 mln GJ in electricity, 4.7 mln 0% Gasoline GJ in heat, 1.7 mln GJ in motor fuel, and 163.7 mln GJ in boiler 5% Fuel oil In addition to the tenured faculty, line managers and highly and heating oil. KMG’s total energy consumption is divided 1% Diesel fuel 0% Liquefied gas qualified specialists from among KMG long-serving operating between three business segments – Upstream, Midstream 3% Heat personnel are engaged by training centres to deliver trainings and Downstream. 8% Electricity and upskilling courses for KMG employees. 0% Oil EXPENSES SPENT ON HSE TRAININGS BY BUSINESS SEGMENTS IN 2019, The year-on-year energy consumption increase was mainly 8% Stripped gas Long-serving employees are also engaged in the mentor KZT THOUS. due to a higher natural and associated gas consumption and internal trainer programmes run by KMG, along with master for the Group’s own operational needs. In 2019, KMG Group’s 137,772 Service classes, trainings and various contests held to recognise best 1 179 877 self-generated energy amounted to 642.8 mln kWh in electricity 64,835 Downstream performers, enhance internal communications and motivate 381,826 Midstream and 3,850.6 thous. Gcal in heat. employees to excel in their jobs. 589,882 Upstream 5 562 KMG Corporate Centre

86 87 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

CLIMATE CHANGE AND GREENHOUSE GAS EMISSIONS

KMG’s long-term Development Strategy prioritises the following We are focused on ensuring the transparency climate-related initiatives: of our environmental reporting, and for the second year • Greenhouse gas (GHG) emissions management running KMG has topped the Environmental Responsibility • Reduction of regular APG flaring Rating of Oil and Gas Companies in Kazakhstan compiled • Improvement of per unit output GHG emissions intensity by the World Wide Fund for Nature (WWF) Russia and CREON and overall energy efficiency Group, supported by the Ministry of Energy of the Republic of Kazakhstan. In 2019, KMG Group’s Emissions Management Policy was approved, its core principles being: On 29 July 2019, KMG issued its first verified 2018 Greenhouse • strict compliance with the regulations and KMG’s obligations Gas Emissions Report1 under the CDP (Carbon Disclosure and commitments Project2 ) climate change programme, disclosing data on direct • compliance with the set emission limits and pollutant and indirect GHG emissions across all KMG’s assets, including emission limits, and observing GHG emission quotas its subsidiaries in Romania and Georgia. • clarity on roles and responsibilities, improving competencies, training and awareness raising • regular recording, taking stock and monitoring of emissions • phasing out regular flaring of raw gas in hydrocarbon production

• implementing initiatives to reduce KMG’s GHG emissions The data include carbon dioxide (CO2), methane (CH4),

and carbon footprint and nitrous oxide (N2O). According to the report data, in 2018, • managing carbon assets direct carbon dioxide emissions across KMG amounted to 9.3 • continuously improving emissions management activities. mln tonnes (2017: 8.4 mln tonnes). The year-on-year increase in emissions was due to higher gas transportation volumes As we seek to boost oil and natural gas production and new emission sources. The greenhouse gas emissions to meet the growing global energy demand, we prioritise data were verified by an independent accredited organisation’s initiatives minimising the negative environmental impact report. Data for 2019 will be disclosed in KMG’s CDP report of our operations, ensuring compliance with environmental to be published in Q3 2020. “We are pleased to have published KMG’s first- The first KMG forum on greenhouse gas emissions management laws, efficient use of natural resources, and continuous ever CDP climate change programme report. (Climate Session) took place in Nur-Sultan on 26 November 2019. improvements to our environmental activities. As the entire world seeks solutions to the climate The forum gathered together around 100 industry delegates change problem, KMG is committed to managing and served as a platform for a meaningful dialogue between the climate risk by reducing emissions, launching professionals and sharing of experiences and knowledge. an energy efficiency CAPEX programme, tracking Lively discussions at the Forum centred around GHG emissions its progress and sharing best practices with other management at KMG, anticipated amendments to GHG laws, global players. This CDP report will enable more emissions trading scheme, KMG’s reporting under the CDP effective measurements and management climate change programme and other important topics. of our environmental impact.”

said KMG HSE Managing Director

For more details on our air protection programme see Vincent Spinelli. our Sustainability Report.

1. For more details see KMG’s published reports which are publicly available at: KMG Group’s GHG emissions report 2018, KMG’s CDP Climate Change Questionnaire. 2. CDP is an independent non-profit organisation. Since 2002, it has been collecting carbon emission and climate change related data on behalf of investors. Thousands of companies across the world’s major economies report their carbon emissions inventories and use CDP to disclose their environmental information. CDP climate ratings assigned to companies based on their disclosures assessment are published by leading financial news agencies (Thomson Reuters, Google Finance) along with the reporting companies’ financial metrics and are considered by investors in asset valuations and related risk assessments.

88 89 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

INCREASING APG UTILISATION RATES WATER PROTECTION

In reducing our GHG footprint, we focus on increasing APG RAW GAS FLARING KMG’s core business is concentrated in Central Asia, Under these commitments, KMG subsidiaries develop five-year utilisation while minimising flaring. In 2019, APG utilisation a region where water is a precious and scarce resource. We plans for efficient use of water, adopt water-saving technology, rate was 97 %, with flaring at 2.95 tonnes per 1,000 tonnes 315.8 recognise our responsibility to society and the environment and increase water reuse. of produced hydrocarbons (11 tonnes in 2017, and 6 tonnes and are making every effort to ensure efficient use of water in 2018), which is down almost 51% year-on-year and also lower 148.9 resources. We improve our water efficiency by introducing water reuse than the IOGP level by 10.5%. 97 systems. Our main water risks are concentrated in our upstream On 1 July 2019, KMG made an official commitment to contribute business. All our production assets are located in Kazakhstan’s 93 We aim to minimise our raw gas flaring. In 2015, KMG supported 85 80.2 to water conservation efforts in Kazakhstan. At an HSE forum regions experiencing water scarcity, whereas the annual the World Bank’s Zero Routine Flaring by 2030 initiative. Flaring 11 held for CEOs of KMG Group companies, Alik Aidarbayev, demand for fresh water is rising both in the industrial sector 6 2.95 reports under the Initiative are submitted on an annual basis. Chairman of KMG’s Management Board, signed a personal and in municipalities. Within KMG Group, Karazhanbasmunai 2017 2018 2019 Statement of Commitment to efficient water management JSC is the biggest fresh water user, withdrawing water for steam (KMG’s eight water-related principles). His initiative was backed injection technology. The Karazhanbas field desalination plant 3 Total raw gas flaring, mln m up by the CEOs of KMG subsidiaries, who signed similar project will enable KMG to reduce fresh water consumption Raw gas utilisation, % statements of commitment on behalf of their respective and place us in the top quartile of IOGP members by fresh Raw gas flaring rate, tonnes per 1,000 tonnes of produced hydrocarbons For more details see our Sustainability Report. companies. These signed statements have been made available water withdrawn from environment. In September 2019, on the official websites of KMG Group companies. CEL commenced construction works at the site, scheduled for completion in 2021.

In 2019, Atyrau Refinery launched the Tazalyq project to design and construct new water treatment facilities at the refinery. Water treatment facilities will be upgraded in two stages: THE EIGHT WATER-RELATED PRINCIPLES WASTE MANAGEMENT 1. upgrade and retrofit of the mechanical wastewater treatment facility (2019 -2021) 1. We see water as an essential and extremely valuable resource for human life and health, for society, and for our operations, and we fully recognise 2. retrofit of the biological wastewater treatment facility We keep record of waste generated across our contracted Historical pollution and oil-contaminated soils are currently the importance of a lean and responsible approach and construction of an advanced treatment facility (2019 - 2023). areas, including all waste produced by our contractors. We also a primary focus for KMG’s remediation efforts, including to our national water resources. monitor our contractors for compliance with the requirements research carried out to take stock of historical pollution sites, 2. We seek not only to comply with the relevant laws The upgrade will also include building new underground for safe transportation, disposal and recycling of waste. and plans developed to address all types of historical pollution of the Republic of Kazakhstan but also to meet international wastewater treatment facilities equipped with the best Compliance with waste management laws is a top priority considering the profile of specific field, region, and climate. The standards and best practices, and listen to all stakeholders technology. The project will allow the refinery to phase out for the Company. To this end, the Company develops across our operating regions. evaporation fields and prevent further negative impact and implements waste management programmes and allocates Memorandum of Cooperation in Environmental Protection 3. We embed fresh water conservation and efficient use on Atyrau’s groundwater, flora, fauna, and air. The sites significant financial resources to address waste generation was signed between the Ministry of Ecology, Geology, into managerial decision-making and operations. of the Tukhlaya Balka evaporation fields will be reclaimed. and land contamination issues across its operations. and Natural Resources of the Republic of Kazakhstan The project will also significantly reduce fresh water withdrawal and KMG on 6 August 2019 to support disposal/recycling 4. We fully understand and carefully examine our primary from the Ural River, as the refinery will use a multi-stage water sources, whether accessed directly or through In line with the environmental laws of the Republic of waste at unorganised sludge dumps (Ozenmunaigas JSC) intermediaries. wastewater treatment system that allows the facility to multiply of Kazakhstan, hazardous waste that cannot be neutralised, and remediation of oil contaminated soils within the areas the volume of its water reuse. The project is expected recycled or disposed of at our facilities is transported to special contracted by Mangistaumunaigaz JSC, Ozenmunaigas JSC 5. We do not use drinking water for industrial purposes. to be completed in the late 2023 and is currently at the pre- landfill sites. and Karazhanbasmunai JSC. construction design and survey stage. A memorandum 6. We seek to introduce a 100% metering of our water withdrawal and disposal. of understanding was signed between the Atyrau Region Akimat and Atyrau Refinery for the water treatment complex in the left- 7. We seek to minimise our fresh water withdrawal bank part of Atyrau to accept standard treated wastewater by introducing water reuse and water saving technologies, from Atyrau Refinery after the completion of its water treatment by reducing the amount of wastewater, and by improving For more details see our Sustainability Report. our water treatment standards to maximise water reuse. project (2023).

8. We build up our capabilities through our membership of industry associations and by joining international water initiatives to understand best practices and continuously improve our water management system. For more details on KMG Group’s water management system and water-related projects see our Sustainability Report.

90 91 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

OCCUPATIONAL HEALTH INJURY

• Employee injury rate is 0.31 (0.25 is our target to rank • The KMG Corporate Centre’s audit plan has been fully AND SAFETY in the IOGP’s top quartile by 2020) implemented (15 out of 15 subsidiaries, associates • "Golden Rules” - breaches of “Golden Rules” are down by 23% and production facilities) year-on-year: 36 cases (2018: 47 cases) • 10 corporate HSE regulations were approved • Hand and finger injuries are down by 57% year-on-year: 9 cases (2018: 21) KMG Group’s Occupational Health and Safety Policy is driven for the crisis management team, and also continued internal by our senior management setting the tone at the top crisis management trainings at its subsidiaries. in occupational health and industrial safety and engaging every Injury rates, number of cases employee in building a safety culture. The leadership of KMG Our review of the Company’s Ground Vehicle Safety and its subsidiaries takes a zero tolerance approach to losses Management System identified three areas for improvement: Key metrics and damage caused by accidents (including traffic accidents), driver training and upskilling, vehicle GPS tracking, 2018 2019 Change % emergencies, as well as by the use of alcohol, narcotic drugs, and trip management system. To enhance transport safety Work-related fatalities 1 2 1 100 psychotropic substances or their analogues. KMG is committed and methodology framework and set unified requirements Non-work related fatalities 21 13 -8 -38 to ensure compliance with both national laws and relevant in line with KMG’s Transport Safety Policy, on 23 October 2019, international and national standards. KMG’s Modernisation and Transformation Council approved Lost-time accidents 48 46 -2 -4 the launch of the Trip Management project within KMG’s Digital As part of the efforts to implement the Roadmap to Improve Transformation Programme. Major lost-time accidents 9 8 -1 -11 Occupational and Environmental Safety in KMG Group approved All road accidents 66 44 -22 -33 by the resolution of the Management Board on 27 September The project aims to improve road safety through instilling a safe 2016 (Minutes No. 39), the Company is phasing in KMG’s driving culture based on global best practice, advanced digital Major and catastrophic road accidents 11 13 2 18 corporate health programmes aimed primarily at reducing solutions, and process automation. Project timeline: 2020– Driving-related injuries 9 10 1 11 the occupational disease rates among employees and fatalities 2022. The project will also unify the trip safety management not related to injuries. The 2019 Roadmap included 31 projects. requirements for all ground transport operations, implement Breaches of Golden Rules 47 36 -9 -23 a centralised tracking of key metrics and enable improved Fires 12 10 -2 -17 In 2019, the Company piloted the Near Miss Reporting/Qorgau fleet utilization through analytical reports and corporate-level Map project to identify and correct unsafe behaviours. The Near indicators. Miss Reporting programme will identify unsafe working conditions and cover employees at all levels, enabling them The health and safety of our employees are the Company’s top 5 YEARS FAR, PER 100 MLN MAN-HOURS 5 YEARS, PER 1 MLN MAN-HOURS to communicate their concerns, issues, and proposals. priority, and we remain committed to zero injuries, i.e. 100% 0.56 safety. We have made significant progress on health and safety 4.5 The Company has in place a Crisis Management System over the past five years. Our employees are engaged on safer 0.49 to ensure rapid responses to potential crises, prevent working conditions and adoption of the highest standards 3.25 2.17 0.42 their escalation, and mitigate the consequences and potential to better protect themselves, their colleagues, and others. 1.28 damage. The system is a three-tier framework which insures But there is still room for improvement. Despite all our efforts, 0.65 0.32 0.31 incident response escalation from the facility and subsidiary we deeply regret to report two fatalities during the second half 0.31 level to the strategic management level at the Corporate Centre. of 2019 – in a road traffic accident and in a fire. 0.25 In 2019, the Company ran its first crisis management exercise 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 KMG IOGP1 KMG IOGP1

1. Available data on the International Association of Oil & Gas Producers (IOGP) performance indicators for 2018 (https://www.iogp.org/).

92 93 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

OCCUPATIONAL HEALTH 68,263 23,495 behavioral observations on work safety behavioral observations on driving safety

KMG, its subsidiaries align their occupational health and safety KMG continued its Heart Attack and Stroke Prevention management with Kazakhstan’s laws and international health corporate health campaign aimed at prevention Zero Injury Rate. Similar forums are held at subsidiaries, e.g. – Preparation and circulation of quarterly letters and safety standards. and reduction of employee fatalities related to cardiovascular KazTransOil JSC held a forum for line managers (over 150 from the Chairman of the Management Board to foster diseases. Additionally, we are tracking and monitoring attendees) in Nur-Sultan safety culture among employees In 2019, employees of subsidiaries lost 162,153 work days the implementation of the 10 Steps to Better Health initiative • A number of ongoing programmes to raise awareness of HSE – Heart Attack and Stroke Prevention brochures were to illness, which is 54,050 days or 24.9% less year-on-year. and KMG Group’s Regulations on Emergency Medical Response issues among employees on the ground were developed distributed across KMG Group The number of non-injury related fatalities among employees setting requirements for employee access to emergency and rolled out, including the following activities: – HSE promotional products were supplied to subsidiaries of subsidiaries reduced by eight incidents or 38% year-on-year. treatment procedures, medical centres equipment – “100% safety” animated wallpaper was installed and the emergency medical response action plans. at company desktops and other devices at subsidiaries – Meetings between KMG and the Fund portfolio companies During the year, we also continued to train specialists and other to share HSE experiences. employees in first-aid and conducted demonstration medical NUMBER OF FATALITY CASES NOT RELATED TO INJURIES emergency response drills at a number of KMG subsidiaries.

To improve occupational health management and performance, 2019 13 we implemented the following measures: PERSONNEL DEVELOPMENT 2018 21 • Developed and approved KMG’s standard covering the Occupational Health Management System in healthcare, 2017 26 emergency medical response, pre-shift physical examination and risk assessment KMG’s corporate social responsibility policy fosters The actual headcount for KMG Group (including subsidiaries, 41 2016 • Demonstration medical emergency response drills development across our operating regions. KMG complies and 50% and more owned jointly controlled entities) was 70,938 at subsidiaries with the legal and regulatory requirements applicable at end-2019. 2015 20 • Cross-audits involving subsidiaries’ and associates’ experts in the Republic of Kazakhstan, as well as with international • First-aid trainings for the HSE function paramedics laws and treaties regulating oil companies. We promote The percentage of locally hired top managers of subsidiaries, • Occupational health trainings for the HSE function specialists meritocracy, fairness, and integrity while providing every and 50% and more owned jointly controlled entities located NUMBER OF THE WORK DAYS LOST DUE TO ILLNESS • Monitoring of KMG’s Occupational Health Management employee with a workplace conducive to new achievements in Kazakhstan is 86%. System performance and improvement measures. and assessing their respective contributions to KMG’s overall success based on merit. We also foster a culture The percentage of employees who are managers at all levels 2019 162,153 To enhance safety culture, the Company has developed a range of understanding, engagement, and support of strategic, is 11.3% of the total headcount. 16.5% of managers are female of measures to reduce work-related injury rates: operational and production goals among our employees and 83.5% are male. 2018 216,203 at all levels. Every year, KMG’s production companies invest 2017 224,565 • In 2019, we continued behavioural safety observations significant amounts in local social and economic growth for task execution (68,263 observations) and driving (23,495 and infrastructure development across our operating regions The actual headcount for KMG Group 2016 243,876 observations) in line with memoranda signed with local Akimats under subsoil was 70,938 at end-2019. • Corporate regulations are continuously updated use contracts. 350,001 2015 and implemented to keep them abreast best global practices and ensure a consistent, holistic approach to health and safety across KMG Group EMPLOYEE HEADCOUNT BY GENDER, % EMPLOYEE HEADCOUNT BY AGE GROUP, % • Three tiers of HSE committees are in place KMG Group regularly runs a range of measures to improve • Comprehensive audits were run at subsidiaries working conditions and prevent professional diseases with the highest injury rates and corrective actions were 2019 82.4 17.6 2019 13.5 59.2 27.3 at production facilities. KMG also developed and is consistently taken to reduce the mitigate the risks of work-related injuries 2018 81.2 18.8 2018 16.7 58.3 25 implementing KMG Group’s Corporate Health and Safety • Off-site presentations were held for both employees Standard aimed to facilitate: to provide training in new safety programmes and top 2017 80.8 19.2 2017 17.5 58 24.5 • setting unified requirements for process set-up to maintain managers to improve safety engagement 2016 79.0 21.0 2016 23 54 23 and improve employee health • The KMG’s drivers are continuously trained in safe driving. • identification and mitigation of risks/hazards through 12 internal trainers delivered training to about 1,366 drivers Male Female Under 30 31 to 50 years Over 50 years improvements to working conditions, ergonomics, (7.2 thous. in total) and workplace hygiene • The 5th Competition of the Chairman of KMG’s Management • use of preventive controls based on assessment of employee Board for the best innovative idea in HSE was held health risks to minimise them as practically possible (employees of 20 subsidiaries submitted 103 applications) • promoting and encouraging healthy lifestyles among • As part of Kazakhstan Energy Week 2019, the first employees at and out of workplace. SPE symposium was held, focusing on health, safety, environment and social responsibility in the Caspian Region (370 participants) • The 5th Annual General Directors’ Forum on occupational health and safety was held to discuss Working Towards a

94 95 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

PRIORITY AREAS OF OUR SOCIAL POLICY SOCIAL SUPPORT PROMOTION OF HEALTHY LIFESTYLES KMG Group companies’ collective bargaining agreements KMG annually holds a corporate sports competition across STUDENT ENGAGEMENT COLLECTIVE BARGAINING AGREEMENTS and Rules for Rendering Social Support guarantee a uniform various disciplines. Every year KMG offers practical training opportunities and pre- KMG Group uses its own model of collective bargaining minimum benefits package and outline an additional benefits graduation internships to Kazakhstan university students. agreement setting out uniform policies covering compensation, package recommended subject to the respective company’s A corporate sports competition was held in Shymkent in 2019. social support, working conditions, work and rest hours, etc. financial position and negotiations between the employer The qualification rounds involved over 3 thous. amateur In 2019, we hired three graduates of the Zhas Orken and employees/trade unions. athletes from 48 KMG subsidiaries. 350 employees from 26 KMG programme. Relevant collective bargaining agreements are signed between subsidiaries reached the finals. the employer and employees at each company. Collective bargaining agreements at KMG facilities offer 35 types About 20 participants in our Digital Summer programme were of social support for employees, their families, and unemployed offered summer intern positions across KMG Group, with four Collective bargaining agreements were signed at 36 production retirees. over 3 thous. interns offered further employment with KMG in 2019. facilities. A total of 58,710 employees across KMG Group participants of KMG’s corporate sports companies have been covered by collective bargaining MOTIVATION PROGRAMMES competition EMPLOYEE ONBOARDING AND TRAINING agreements. A uniform compensation system has been introduced Since 2019, KMG Group’s training concept has been focused across KMG’s E&P business segment companies to ensure on operational staff development, including both managers, consistency of compensation policies across all units and drive CHARITY AND SPONSORSHIP engineering and technical personnel, and blue-collar workers. employee ownership of results. This system sets out a number All sponsorship and charitable programmes on behalf

The KMG Corporate Centre together with KMG Engineering 58.7 thous. people of compensation payments, allowances, and additional of Samruk-Kazyna JSC are run by Samruk-Kazyna Trust Social LLP developed and approved development programmes covered by the collective bargaining agreement entitlements payable subject to qualifying conditions, including Development Foundation, assisted by public authorities, for operational staff jobs, such as Reservoir Engineer (in a region-specific ratio, which is a percentage added to one’s the Government of Kazakhstan, and experts in public and social 2019 the programme covered 25 employees at production TRADE UNIONS salary to cover extra expenses and to compensate for tougher policies. companies such as Ozenmunaigas JSC, Karazhanbasmunai JSC, Employees of KMG Group companies may choose to set up working environment in harsh-climate regions. Mangistaumunaigaz JSC, KMG Engineering LLP, Kazakhoil Aktobe a trade union at their own discretion. In 2019, social investments under subsoil use contracts across LLP, and Kazakhturkmunay LLP). In 2019, KMG employees took part for the first time KMG Group totalled KZT 7.6 bln. KMG Group’s uniform internal communications framework in an international skills competition hosted by TATNEFT. Another focus in our employee upskilling and training requires the management team to hold consultations The purpose of the event was to share experiences, provide During the year, KMG also allocated KZT 22.8 bln to develop programmes is our refinery modernisation effort, which with the Group companies’ trade unions. professional training, and strengthen ties between companies. infrastructure at Turkistan as instructed by the Government requires relevant staff to improve their skills. In 2019, modular of the Republic of Kazakhstan (construction of a 7,000-seat training was provided to Pavlodar Refinery employees on IBM KMG Group has 40 trade unions, including shopfloor and local During the four days of the event, 182 employees from 26 KMG stadium, a congress hall, and a 1,000-seat amphitheatre). Maxima and process management. We also ran bootcamps trade unions, which defend the interests of 55,657 employees. Group entities competed in different skill sets. at Petromidia Refinery, Romania, to provide training in maintenance management to employees of Pavlodar Refinery,

Atyrau Refinery, and Caspi Bitum. KZT 7.6 bln 40 social investments under subsoil use contracts Mandatory training programmes and upskilling courses remain trade unions our key training priority, with KMG Group spending a total of KZT 6.5 bln to train over 140 thous. employees in 2019. The number of trainees is calculated based on completed trainings (e.g. one employee completing two trainings counts as two trainees). Average academic hours of training per year per employee is 17.6 hours.

over 140 thous. peoplе were trained in compulsory programmes and upskilling courses

96 97 NC KazMunayGas JSC Annual Report 2019 01 Strategic Report | 02 Corporate Governance | 03 Financial statements

TOTAL NUMBER OF EMPLOYEES TRAINED BY YEAR, THOUS. PEOPLE Average academic hours of training per year per employee is 17.6 hours.

2019 143 The number of trainees is calculated based on completed trainings (e.g. one employee completing two trainings counts 2018 129 as two trainees).

2017 120 Over 2019, KMG Group companies spent around KZT 22 bln on social support for their employees (2018: KZT 22 2016 98 bln), including social support for unemployed retirees. An important share of the benefits package offered across KMG Group includes voluntary health insurance for employees EMPLOYEE DEVELOPMENT COSTS, KZT BLN and their families, maternity and childcare benefits, children’s education, help to large families, organisation of summer recreation for children, and additional compensations 2019 6.5 for employee leaves.

2018 5.7 Costs by support area 2017 5.6 Costs Share, % 2016 4.5 voluntary health insurance of employees 22 and their families against the risk of illness maternity and childcare benefits, children’s 18 EXPENSES FOR EMPLOYEE SOCIAL SUPPORT, KZT BLN education, help to large families organisation of summer recreation for children 17 and additional compensation for employee 2019 22 leaves SOCIAL STABILITY INDEX (SSI) social support for unemployed retirees 7 2018 22 financial support for treatment/surgical 2 2017 19 procedures above the health insurance limit The Social Partnership Centre at Samruk-Kazyna JSC (Centre) Following the study, the most alarming areas of concern annually compiles a Social Stability Index (SSI) for KMG Group requiring prevention measures were presented for every financial support for purchasing school 3 2016 19 accessories by the start of the school year (1 companies. In 2019, the Centre conducted an SSI survey subsidiary and associate. Based on reports for each facility, September) involving 25 KMG subsidiaries (6,906 respondents). The sample an Action Plan for 2019–2020 was prepared to eliminate reflects the headcount structure at KMG and its subsidiaries or minimise the areas of concern identified by the study. benefits paid to employees with disabled 2 spouses or children with lifelong disabilities at the social/demographic, organisational/territorial, for the Day of Persons with Disabilities and hierarchical levels. The Action Plans provided for measures to increase employee satisfaction and their confidence in management actions, Other types of social support1 29 The study suggests that KMG’s SSI improved from 61% in 2014 build a feedback-loop system, improve working conditions, to 72% in 2019 (“above average” score), reflecting, according and arrange for housing and catering, as well as measures to the methodology, the Company’s increased focus on social to ensure decent working conditions, supply high-quality KMG Group has no gender pay and bonus gap. The pay development. Based on reports for each facility, an Action uniforms and personal protective equipment, improve catering level at KMG Group entities is linked to position rather Plan is prepared to eliminate or minimise the areas of concern arrangements, provide training and professional development than an individual employee, i.e. men and women holding identified by the study. opportunities, a more effective feedback mechanism, the same position will receive the same pay and other bonuses a motivation and incentive system, etc. The planned activities under our corporate compensation policies. Our executives The study covered 14% of the total headcount. were completed in 2019. receive annual bonuses for achieving their annual KPIs, with quarterly bonuses paid to administrative staff for meeting their quarterly targets.

RESPONDENTS, %

3% 6% 1 179 877 72% 20% 70% social stability index Blue-collar employees Specialists Managers

1. Other types of social support (financial assistance to the veterans of the Soviet-Afghan War for marriage, to employees who participated in the Chernobyl disaster Auxiliary and support staff response or were exposed to the Semipalatinsk Test Site, in connection with the death of an employee/close relatives, for the organisation of funerals; pregnancy and childbirth benefits; benefits paid to the family of an employee who died in an accident; assistance to employees in dire need; compensation of housing rent expenses to employees; free attendance of sports facilities; benefits paid to employees celebrating a jubilee; compensation of expenses for childcare institutions; benefits due to award winners; benefits paid for achieving a retirement age; increased sick pay; onboarding compensation; compensation of expenses for medicines; New Year presents for children).

98 99 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

KazTransGas operates the largest trunk gas pipeline network in Kazakhstan with a total length of 19,146 km and an annual capacity of 230 bcm, as well as gas distribution networks with a length of over 49 thousand km. #1

IN GAS IN KAZAKHSTAN TRANSPORTATION

COMMERCIAL GAS SALES The Company occupies 79% of VOLUMES IN 2019 WERE 22.8 the Republic of Kazakhstan's BCM, WITH 8.8 BCM OF GAS gas transportation market EXPORTED, OF WHICH 81% WERE SENT TO CHINA

NEXT: CORPORATE GOVERNANCE

100 101 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CORPORATE GOVERNANCE FRAMEWORK

KMG’s corporate governance framework represents the totality KMG’s corporate governance framework is based on respect of processes ensuring management and oversight of KMG’s for the rights and legitimate interests of KMG’s shareholders activities and a system of relations between the shareholders and key stakeholders: the state, KMG’s strategic partners (Samruk-Kazyna JSC and the National Bank of Kazakhstan), and counterparties (suppliers and customers), investors, Board of Directors, Management Board, and stakeholders. and employees, as well as municipalities, local communities, and residents in KMG’s operating regions. The roles of KMG’s governing bodies are clearly delineated and set out in the KMG Charter. KMG’s corporate governance framework is continuously improved to reflect the evolving requirements and standards of national and international corporate governance practices.

KMG’s Corporate Governance Structure

General Meeting of Shareholders1 Committees of the Board

Internal Audit Service Board of Directors Finance Committee

Compliance Service Nomination and Remuneration Committee RESPONSIBILITY STATEMENT Strategy and Portfolio Management Committee In line with the KMG Corporate Each member of the Board of Directors confirms that to the best of their knowledge: Governance Code, the Board • the financial statements, prepared in accordance with IFRS, give a true and fair of Directors, and the Management Board view of the assets, liabilities, financial position, and profit or loss of the Company are responsible for preparing a reliable and the undertakings included in the consolidation taken as a whole Health, Safety, Environment and Sustainable annual report and financial statements • the Management Board’s report includes a fair review of the development Development Committee of the Company. and performance of the business and the financial position of the Company and the undertakings included in the consolidation taken as a whole, together The Board of Directors and each member with a description of the principal risks and uncertainties they face. Audit Committee of the Board of Directors confirm that Management Board they recognise their responsibility In line with the KMG Corporate Governance Code, the Board of Directors has for preparing and approving the annual determined that Christopher Walton, Philip Dayer, Stephen Whyte, and Luís Maria report and financial statements, Viana Palha da Silva are independent in character and judgement. The Board and that to the best of their knowledge of Directors has also determined that there are no relationships or circumstances the annual report and financial which are likely to affect, or could appear to affect, the directors’ judgement. statements, taken as a whole, are fair, balanced, and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model, and strategy.

1. Represented by the Management Board of Samruk-Kazyna JSC.

102 103 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CORPORATE GOVERNANCE DEVELOPMENT REPORT

At KMG, employees at all levels of the organisation recognise of these reports, the Board of Directors provides feedback that good corporate governance and transparency are the key to the Chairman of KMG’s Management Board and the heads drivers of investment appeal and operational efficiency, of KMG’s functional units involved in the improvement boosting confidence among potential investors, counterparties, of corporate governance practices. and other stakeholders, mitigating the risk of inefficient use of corporate resources, and increasing the national wealth In order to ensure proper and timely implementation and KMG’s market value. of activities within the Corporate Governance Plan, the Board of Directors approved in 2019 a corporate KPI on “The Progress The KMG Corporate Governance Code1 adopted in 2015 (the of the Detailed Action Plan to Improve Corporate Governance “Code”) is the core document underpinning KMG’s corporate at KMG”. In addition, the Fund’s and KMG’s Development governance framework and our efforts to improve it. Strategies until 2028 outline the milestones for the ambitious targets established by the “Corporate Governance Rating” KPI. The Corporate Secretary annually reviews KMG’s compliance These efforts demonstrate the increased focus on corporate with the Code’s provisions and principles using the “comply governance shown by KMG’s major shareholder, Board STRATEGIC SESSION 2019 OFF-SITE MEETING OF THE BOARD or explain” approach. At present, most of the Code’s of Directors, Audit Committee, and management. provisions have been complied with. Isolated instances of non- On 4 September 2019, a strategy session was held to review OF DIRECTORS AT PRODUCTION compliance with certain provisions of the Code have been listed Thus, in 2019, KMG successfully implemented a number the implementation of KMG’s Development Strategy, approved in the Corporate Governance Code (CGC) Compliance Report, of initiatives to further implement the Corporate Governance in 2018, until 2028. There was a positive discussion of the most FACILITIES OF KMG’S SUBSIDIARIES along with the reasons for non-compliance. For KMG’s 2019 CGC Plan, with the greatest progress made in areas such pressing issues between members of KMG’s Board of Directors Compliance Report, see the Appendix to this Annual Report. as the performance of the Board of Directors, risk management, and the Management Board, in particular on the strategy AND ASSOCIATES and sustainability. update with respect to the gas initiatives. Following an independent review conducted by an independent On 30 June 2019, KMG’s Board of Directors held an off-site consultant in 2018 using the review methodology for corporate meeting at production facilities of JV Kazgermunai LLP (“KGM”) governance in legal entities in which 50% or more of the voting and PetroKazakhstan Oil Products LLP (“Shymkent Refinery”). shares are owned directly or indirectly by the Fund (KMG’s SUSTAINABILITY MEETING major shareholder), KMG was assigned a “BB” corporate “BB” In the Kyzylorda Region, the Board of Directors visited an oil governance rating which shows that the Company’s Corporate Governance Rating production and refining complex and heard KGM management’s corporate governance system in all materials respects most OF THE BOARD OF DIRECTORS progress report on the implementation of its Smart Field of the identified metrics, however, there is insufficient evidence project. KGM is one of KMG Group’s most technologically to demonstrate the system operates effectively. On 1 July 2019, the Board of Directors had a special advanced production assets. sustainability meeting, to which members of the Management Throughout 2019, KMG consistently and thoroughly Board were invited. As part of the meeting, an external trainer In Shymkent, members of the Board of Directors visited implemented the recommendations presented hosted a workshop for executives and senior managers, a renovated refinery, where equipment upgrades were by an independent consultant following the corporate followed by a discussion of some of the more important issues completed in 2018 as part of the State Programme governance review and included in the 2019–2020 Detailed related to KMG Group’s long-term sustainability agenda. of Accelerated Industrial and Innovative Development. Action Plan to Improve Corporate Governance at KMG (the The equipment upgrades have enabled Shymkent Refinery “Corporate Governance Plan”), approved by KMG’s Board The Board of Directors and the Management Board recognise to produce motor fuels meeting K4 and K5 environmental of Directors. The Corporate Governance Plan comprises the high-priority of ecology, environmental protection standards as per the Customs Union’s Technical Regulations over 500 activities covering various aspects of corporate and the health and safety of KMG employees across the Group’s (Euro-4 and Euro-5 compliant fuels). The refinery’s throughput governance such as the performance of the Board operations, as well as the great importance of building a talent capacity is now up to 6.0 mln tonnes of crude oil per annum, of Directors and the executive body, risk management, pipeline and committing to universally recognised Sustainable with the refining depth increased to 88.7% and the light product internal control and audit, sustainability, shareholder rights, Development Goals (SDGs). yield up to 76%. and transparency. The Corporate Secretary regularly prepares progress reports on the implementation of the Corporate Governance Plan and submits them for review by the Audit Committee and the Board of Directors. Following the review

1. KMG Corporate Governance Code is available on the corporate website in section "Internal Documents"(http://www.kmg.kz).

104 105 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

FOLLOW-UP ON KMG’S KEY ISSUES

To oversee the implementation of KMG’s strategic initiatives and performance reports submitted by functions reporting and ensure timely corrective actions, KMG’s Board of Directors to the Board of Directors. requires the Chairman of KMG’s Management Board to report regularly on key changes in the Group’s operations At every meeting, the Board of Directors’ Strategy and Portfolio and give other updates on HSE issues, interim financial Management Committee considers and discusses progress and operating results, interested-party transactions approved reports on major oil and gas projects (Kashagan, Karachaganak, by the Management Board, progress on implementation and Tengiz), as well as on transformation and privatisation of the Group’s strategy, KPIs achievement, investment programmes. projects implementation, as well as follow-up reports on KMG’s consolidated Development Plan, risk reports, reports from the Board Committee chairs on delegated issues, follow-up reports on resolutions of the Board of Directors,

QUALITY AND PROMPTNESS OF PRESENTING MATERIALS TO THE BOARD OF DIRECTORS

KMG has amended its Charter to adjust timings New forms of the key documents used in preparations for the submission of materials for meetings of the Board for the Board meetings have been introduced to facilitate of Directors. The Chairman of the Board of Directors the most concise and informative communication to the Board draws up a meeting agenda at least ten calendar days members of all information they would require to review prior to the meeting, and at least fifteen business days the relevant issues. These documents must disclose prior to the meeting considering issues relating to KMG’s the relevant risks and economic impact, as well as alignment Development Strategy, KMG’s consolidated Development Plan, with KMG’s Development Strategy and Business Plan. motivational KPIs for the head and members of the executive DELEGATION OF CERTAIN ISSUES BY KMG’S BOARD OF DIRECTORS body, KMG’s annual report or involvement in establishing a legal TO BOARD COMMITTEES entity. Rules for the preparation of materials for meetings of KMG’s In 2018, the Board of Directors started to consider delegating The Board of Directors delegated to the Audit Committee Board of Directors and its Committees have been developed issues to Board Committees to reduce the number of items the issues related to overseeing the risk management and approved. In accordance with the rules, regular feedback on the Board of Directors’ agenda allowing it to focus and internal control systems, as well as internal audit. on the quality and promptness of materials prepared on the discussion of strategic and key issues while maintaining for the Board meetings is collected from each member high quality and efficient decision making on the delegated Given the delegation of issues, the Board of Directors is now of the Board of Directors. issues. regularly updated by the Committee chairs on matters reviewed by the respective Board Committees. The Committee chairs’ The Board of Directors delegated the following issues reports have been included in the Board of Directors’ 2020 to the Nomination and Remuneration Committee: thе election activity plan. of members of the Board of Directors and the executive body in subsidiaries and associates; performance assessments, remuneration, succession, and development plans for members of the executive body and the Corporate Secretary; KPIs for executives who are not members of the executive body.

106 107 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

REPORT BY THE BOARD OF DIRECTORS

The Board of Directors is responsible for the overall management The Board of Directors determines KMG’s business priorities of KMG’s activities. Resolutions of the Board of Directors and approves its Development Strategy; considers and makes are adopted in the procedure set forth in the applicable resolutions on potential acquisitions and other significant laws and the KMG Charter. Even though the applicable laws financial issues, including the terms of bonds and derivatives and the KMG Charter allow the Board of Directors to adopt issued by KMG; approves major and interested party resolutions as long as a quorum is achieved and a certain transactions; approves acquisitions and transfers (assignments) majority of votes is cast in favour, KMG endeavours to have of subsoil use rights; approves conclusion of partnership Board and Committee membership Nomination and Remuneration the most important resolutions adopted at meetings held contracts (agreements) with strategic partners for joint Committee in person and to have all Board members take part in the voting. implementation of subsoil use projects; approves investment KMG makes every effort to prepare such resolutions through projects funded by KMG or its subsidiaries; reviews the results preliminary consultations and to have such issues approved of independent analysis of KMG’s corporate governance Strategy and Portfolio by a qualified majority vote, ensuring that the perspectives framework; and approves a corporate governance improvement Management Committee of independent directors are taken into account. plan.

Finance Committee

Audit Committee MEMBERSHIP OF THE BOARD OF DIRECTORS Board members Tenure of the Board members independent director 2014 2015 2016 2017 2018 2019

Christopher John Walton1 KMG has a high proportion of independent Non-Executive The Board of Directors has one woman, B. K. Grewal. directors with four directors out of the Board of nine directors Out of nine Board members, three are Kazakhstan nationals, Stephen James Whyte being classified as independent. four are UK nationals, one is a national of Malaysia, and one Philip John Dayer is a national of Portugal. As at year end 2019, the Board composition was as follows: Luís Maria Viana Palha da Silva

TOTAL NUMBER OF BOARD MEMBERS: THE BOARD OF DIRECTORS’ BREAKDOWN BY AGE: representative of Samruk-Kazyna JSC 1 1 Baljeet Kaur Grewal 1 179 877 1 179 877 4 Uzakbay Karabalin

Independent directors under 44 Almasadam Satkaliyev The Fund between 49 and 56 9 representatives 9 between 62 and 72 Anthony Espina Executive director (Chairman of KMG’s CEO Management Board): 3 Alik Aidarbayev 4 5

first term Health, Safety, Environment and Sustainable Development second term Committee Average age of Board members: Committee Chairman 59 years

1. Chairman of the Board of Directors.

108 109 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In 2017, Samruk Kazyna JSC determined KMG’s Board of Directors to consist of nine members. However, over time, the membership decreased and at the beginning of 2019, the Board of Directors consisted of seven members. This was followed by the election of two more members to the Board of Directors in 2019. During 2019, the following changes occurred in the membership of KMG’s Board of Directors:

BREAKDOWN OF THE BOARD OF DIRECTORS BY EXPERTISE AND PREVIOUS EXPERIENCE OF SERVICE ON BOARDS AT OTHER COMPANIES

On 4 January 2019, Yerlan Baimuratov left On 29 April 2019, Luís Maria Viana On 20 May 2019, Anthony Espina was the Board of Directors of KMG Palha da Silva was elected to the Board elected to the Board of Directors of KMG of Directors of KMG as a member/an member/representative of Samruk- independent director Kazyna JSC

C. J. Walton A. S. Aidarbayev A. M. Satkaliyev The procedure for nominating Members of the Board of Directors are elected from the candidates nominated Transport, oil & gas, finance Oil & gas Oil & gas, privatisation and selecting candidates to the Board as representatives of shareholders and other entities. Candidates to the Board of Directors is set out in the KMG Charter of Directors are expected to possess the knowledge, skills, and experience required and other regulatory documents. Board to perform their functions and support the creation of KMG’s long-term business value members are elected by the General and sustainable growth, as well as to have an impeccable business reputation. Meeting of Shareholders, supported by the Chairman of the Board The Chairman of the Board of Directors is elected by the General Meeting of Directors and the Nomination of Shareholders. and Remuneration Committee chair. The recruitment and hiring process Independent directors are elected in accordance with the approved guidelines is driven by transparency, impartiality, for election of independent directors at companies that are part of Samruk-Kazyna and meritocracy. Group. U .S. Karabalin B. K. Grewal A. Espina Oil & gas Strategy, finance Stock markets Members of the Board of Directors are elected for a three-year term. Through a special consideration procedure, a member of the Board of Directors with a six-year continuous tenure may be re-elected for a new term, in each case considering the need for the Board to be effectively refreshed. As an exception, a member of the Board of Directors with a nine-year tenure may be re-elected (for independent directors, a detailed and compelling case needs to be prepared, to be disclosed by the Company to all stakeholders).

P. J. Dayer S. J. Whyte L. M. Palha Finance, audit, risk management Oil & gas, strategy Oil & gas, petrochemicals, HR

KMG believes that the Board of Directors is well-balanced across all areas in terms of its skills and expertise.

110 111 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Christopher John Walton Alik Aidarbayev Almasadam Satkaliyev Chairman of the Board of Directors, Independent Director Member of KMG’s Board of Directors, Chairman of KMG’s Member of KMG’s Board of Directors, representative Management Board of Samruk-Kazyna JSC Member of KMG’s Board of Directors since 2014 Member of KMG’s Board of Directors since 2018 Member of KMG’s Board of Directors since 2018 Date of birth: 19 June 1957 Date of birth: 19 May 1963 Date of birth: 31 October 1970 Education: Education: Education: • Bachelor of Arts (BA) in Political Science, the University of Western • Oil and Gas Fields Development Technology and Complex • Stanford Executive Programme (SEP) and Stanford Graduate School • The Finance Economics programme (specialisation: Economics), • Master in Business Administration (МВА), Finance, the University Mechanisation, Kazakh Polytechnic Institute named after V. I. Lenin of Business, Stanford University (US) Department of Public Sector Economy and Finance, the Institute of Western Australia • Executive MBA and Graduate School of Business (a joint programme of Public Administration and Civil Service of the Russian Presidential • Fellow of the Royal Aeronautical Society with Duke University’s Fuqua School of Business), Nazarbayev Academy of National Economy and Public Administration (Russia) • Fellow of the Institute of Directors University (Kazakhstan) • Mechanics and Applied Mathematics, Al-Farabi Kazakh National • Master in Economics, the Russian Presidential Academy of National University (Almaty) Economy and Public Administration (Russia)

Experience Experience Experience In addition to his role as Chairman of KMG’s Board of Directors, Between 1985 and 1995, Alik Aidarbayev worked at Zhetibayneft’s Almasadam Satkaliyev served as CEO of TaSSaT LLP, a manager Almasadam Satkaliyev also acted as a member of the Boards Christopher Walton is Audit Chair of the Submarine Delivery Agency Upstream Unit as an operating engineer, at Mangyshlakneft Oil and Head of the Clearance Department at CJSC NCOT KazTransOil, of Directors at JSC NC Kazakhstan Temir Zholy and Kazakhstan (UK) and a Non-Executive member of the Royal Navy’s National Production Association as Deputy Head of a reservoir pressure Vice President of Economics and Managing Director at the Nur-Sultan Electricity Association, Chairman of the Board of Directors of JSC Shipbuilding Strategy Client Board. maintenance shop, and later at SJSC Yuzhkazneftegas as Head Representative Office, Head of the Project Management Department KEGOC, Chairman of the Kazakhstan National Committee at the World of a reservoir pressure maintenance shop, Head of the Upstream Unit, at JSC NCOT KazTransOil, CFO and Vice President of Economics at JSC Energy Council (WEC), a member of the Board and Chairman Pro-bono, Mr Walton is a trustee of the Guild of Freemen of the City Deputy CEO and First Vice President. Kazakhstan Electricity Grid Operating Company (KEGOC). of the Coordination Council for at KAZENERGY of London’s Charity. He recently stepped down as the Interim Chairman Association, Chairman of the Energy Committee and a member of the UK Institute of Directors. At different periods he was CEO of JSC Turgai Petroleum, CEO of JSC At different periods he was First Vice President of JSC Kazakhstan of the Presidium of National Chamber of Entrepreneurs of the Republic Mangistaumunaigaz, Upstream Managing Director at KMG, CEO of JSC Electricity Grid Operating Company (KEGOC), Director for Power of Kazakhstan Atameken, and Chairman of the Committee on Power He is an experienced company chairman: Lothian Buses plc (buses KazMunaiGas Exploration Production, Akim of the Mangystau Region, Generation Asset Management at JSC Kazakhstan Holding and trams), Goldenport Holdings (shipping) and Asia Resource Minerals and Electrical Engineering at Association of Kazakhstan Machinery First Vice Minister for Investments and Development of the Republic for the Management of State Assets Samruk, Director - Head of KEGOC Industry. plc (coal mining). In addition, he was the Senior Independent Director of Kazakhstan, and Deputy Chairman of the Management Board Group, Vice Minister of Energy and Mineral Resources of the Republic of Rockhopper Exploration plc (offshore oil exploration) and Audit at Samruk-Kazyna JSC. of Kazakhstan, Chairman of the Management Board, First Vice Apart from that, Kazakhstani Electric Power Association awarded Chair of JSC NC Kazakhstan Temir Zholy. President and President of KEGOC, Managing Director at Samruk- him an honorary title “Honored Power Engineer of the CIS” for his work Holds no shares in KMG or its subsidiaries and associates (directly Kazyna JSC, Chairman of the Management Board of JSC Samruk-Energy, in the field of energy. In the past he has been a Non-Executive member of the Audit or indirectly) and is not involved in any transactions therewith. Committee of the UK Department for Digital, Culture, Media and Sport. Deputy Chairman of KAZENERGY Association, and Head of the Asset Management Department at Samruk-Kazyna JSC. Holds no shares in KMG or its subsidiaries and associates (directly In addition, Mr Walton was a member of the Bank of the England’s or indirectly) and is not involved in any transactions therewith. Regional Economic Advisory Panel (SE England & Anglia) from 2002 to 2005.

As Finance Director of easyJet plc, Mr. Walton successfully directed its IPO. He has held senior finance and commercial posts at Qantas, Air New Zealand, Australia Post and Australian Airlines. Mr. Walton has also worked for BP Australia, in the Australian Senate and for Hamersley Iron.

Mr Walton is a Court member (and Treasurer) of the Guild of Freemen of the City of London.

Holds no shares in KMG or its subsidiaries and associates (directly or indirectly) and is not involved in any transactions therewith.

112 113 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Uzakbay Karabalin Baljeet Kaur Grewal Anthony Espina Member of KMG’s Board of Directors, representative Member of KMG’s Board of Directors, representative Member of KMG’s Board of Directors, representative of of Samruk-Kazyna JSC of Samruk-Kazyna JSC Samruk-Kazyna JSC

Member of KMG’s Board of Directors since 2016 Member of KMG’s Board of Directors since 2016 Member of KMG’s Board of Directors since 2019

Date of birth: 14 October 1947 Date of birth: 2 May 1976 Date of birth: 27 June 1948

Education: Education: Education:

• Mining Engineering, the Gubkin Russian State University of Oil • Bachelor in International Economics with first-class honours, • Bachelor of Business, University of Southern Queensland and Gas the University of Hertfordshire (UK) The Executive MBA programme,

• Postgraduate programme at the Gubkin Russian State University Cambridge University (UK) of Oil and Gas • Advanced Exec Ed from Massachusetts Institute of Technology (MIT) • Candidate of Technical Sciences Sloan School of Management on Blockchain Technologies. • Doctor of Technical Sciences • Academician of the National and International Engineering

Academies of the Republic of Kazakhstan

Experience Experience Experience:

Uzakbay Karabalin held various positions at Kazneftegazorazvedka’s Baljeet Grewal provides strategic oversight to the Fund's portfolio He started his career as a computer programmer in Australia in 1969. Joint appointment and membership in the Board of Directors: administration office (the South Emba oil and gas prospecting of investments and advises on corporate and investment strategy In 1971, he returned to Hong Kong and worked as a computer expedition), Kazakh Scientific Research Geological Exploration development. systems analyst developing business applications for the largest • INED of China Cloud Copper Company Limited (listed on Hong Kong Oil Institute, Prikaspiygeologiya’s regional administration office, shipbuilder. In 1973, he joined Arthur Andersen & Co. as an auditor Exchanges and Clearing); She has 18 years of international experience in senior executive posts the Guryev branch of Kazakh Polytechnic Institute named after and was promoted to partner in 1982. His clients included large • NED of ATF Bank in Kazakhstan (listed on KASE, Kazakhstan). V. I. Lenin, the Industry Department of the Administration Office in sovereign wealth funds and global investment banks. She was banks, insurance companies, fund management companies of the President and of the Cabinet of Ministers of the Republic Advisor at the Asian Development Bank (West Asian Mission), Managing and the Hong Kong Government. During this time, in addition Director & Vice Chairman at the investment research arm of Kuwait Holds no shares in KMG or its subsidiaries and associates (directly of Kazakhstan. to assisting international banks in the development of IT Strategic or indirectly) and is not involved in any transactions therewith. Finance House, Vice President of Maybank Group (Malaysia) and held Plans and implementation of banking systems, he also developed At different periods he was Head of the Main Oil and Gas Department senior investment banking posts at ABN AMRO Bank and Deutsche the housing database for the Hong Kong Housing Authority, which at the Ministry of Energy and Mineral Resources of the Republic Bank. housed over 3 mln of the Hong Kong population (7.5 mln). of Kazakhstan, Deputy Minister of Energy and Fuel Resources of the Republic of Kazakhstan, Deputy Minister of Oil and Gas Industry Baljeet has deep experience in strategy, investment advisory In 1986, he joined Deloitte as a partner in charge of consulting. During of the Republic of Kazakhstan, First Vice President and Acting President and national economic strategies in emerging markets. She his time with Deloitte, he was seconded to the Hong Kong Government of CJSC NOGC Kazakhoil, President of CJSC KazTransGas, Vice Minister worked in close cooperation with the ECB, IMF, World Bank and developed the Central Clearing and Settlement System of Energy and Mineral Resources of the Republic of Kazakhstan, and various governing bodies on regulatory and policy development for the Stock Exchange of Hong Kong. President of KMG, CEO of JSC Mangistaumunaigaz, CEO of the Kazakh in emerging markets. She is an award winning research analyst Institute of Oil and Gas, Minister of Oil and Gas of the Republic having led a successful investment research arm in the Middle East In 1991, he founded his own securities dealing and investment of Kazakhstan, and First Deputy Minister of Energy of the Republic and has extensive experience in the oil and gas sector of developing advisory business. In 2005, he was chairman of the Hong Kong of Kazakhstan. and frontier markets. Baljeet is a key advocate of women in finance. Securities Association and is currently Permanent Honorary President of the Association. In 2012, he advised on the purchase of ATF Bank, Uzakbay Karabalin was also Chairman of the Boards of Directors Holds no shares in KMG or its subsidiaries and associates (directly one of the top ten banks in Kazakhstan, and in May 2013, he was at CJSC KazTransOil, CJSC NC Oil and Gas Transportation, CJSC NC or indirectly) and is not involved in any transactions therewith. appointed as CEO and Chairman of the Management Board of ATF KazMunaiGas and JSC KazMunaiGas Exploration Production, Chairman Bank until his retirement in April 2019. He was also an Independent of the Coordination Council and Deputy Chairman of KAZENERGY Non-Executive Director of the ENPF, the central provident fund Association, a member of the Supervisory Board at KazRosGas of Kazakhstan from July 2014 to May 2017. LLP, a member of National Investors’ Council under the President of the Republic of Kazakhstan, Chairman of the Board of Directors of the Atyrau University of Oil and Gas, and a member of the Board of Directors (Independent Director) of the Kazakh Institute of Oil and Gas.

Holds 9,655 ordinary shares in JSC KazTransOil.

114 115 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Philip John Dayer Stephen James Whyte Luís Maria Viana Palha da Silva Member of KMG’s Board of Directors, Independent Director Member of KMG’s Board of Directors, Independent Director Member of KMG’s Board of Directors, Independent Director

Member of KMG’s Board of Directors since 2018 Member of KMG’s Board of Directors since 2017 Member of KMG’s Board of Directors since 2019

Date of birth: 5 January 1951 Date of birth: 20 January 1966 Date of birth: 18 February 1956

Education: Education: Education:

• Bachelor of Laws, King’s College London (UK) • Bachelor of Science in Geophysics (with honours), the University • Bachelor in Economics, Lisbon School of Economics and Management • Fellow of the Institute of Chartered Accountants in England of Edinburgh (UK) (Portugal) and Wales • International Baccalaureate, Pearson College UWC (Canada) • Bachelor in Economics; Management and Business Administration, the Catholic University of Portugal • Advanced Management Programme (AMP), the Wharton School of the University of Pennsylvania (US) • Key Strategic Issues in Modern Retailing, INSEAD business school • Leading Organic Growth, the Darden School of the University of Virginia (US)

Experience Experience Experience

After his qualification as a chartered accountant, Philip Dayer began Stephen James Whyte has extensive experience in the oil and gas Between 1981 and 1986, Luís Maria Viana Palha da Silva was a manager At different periods he was President of Apetro (the Portuguese his career in investment banking specializing in corporate finance industry. At different periods he headed field development groups at a leading Portuguese inorganic chemistry company. From 1987 association of oil companies), an independent member of the Board at major banks. at Shell, directed joint ventures and infrastructure at Shell EP Europe, to 1992, he was CFO of Covina, Companhia Vidreira Nacional, a leading of Directors and Audit Committee at NYSE Euronext in New York, was Commercial Director, Business Development Manager, Non- Portuguese producer of sheet glass. and Chairman of the Portuguese Issuers Association (AEM). Currently, In 2005, he retired from ABN AMRO Hoare Govett and since then Operating Assets Manager and Head of Exploration at Clyde Petroleum he is a Non-Executive member of the Board of Directors of Nutrinveste has been an independent director at various oil and gas, software, B.V., Upstream Vice President and Head of Shell EP’s Brazil office, Senior Over the next three years, he served as Secretary of State (one of largest Portuguese olive oil producers), Chairman of the Audit and financial service companies. In 2006, he was engaged by Vice President Commercial at BG Group, COO and Head of Exploration for Trade, responsible for foreign trade and controlling national Committee of Seguradoras Unidas (insurance company in Portugal, as a consultant and participated in the company’s successful IPO. and Production at . Between April 2017 and December investment, foreign trade, food safety and competition authorities with presence in Angola and Mozambique) and Chairman of the Government of Portugal. Philip Dayer is currently a member of the Boards of Directors 2019, he held the role of the Non-Executive Chairman of of the General Meeting and member of Supervisory Board of EDP at PJSC Severstal, VTB Capital plc. and The Parkmead Group. plc. In his tenure as CFO of Cimpor - Cimentos de Portugal from 1995 Electricidade de Portugal (leading electricity company in Portugal, listed in Euronext Lisbon). From 2010 to 2018, he was a member of the Board of Directors of JSC Currently, Stephen Whyte serves as Non-Executive Director at Echo to 2001, he turned the company into a regional leader in the production KazMunaiGas Exploration Production. Energy plc. He was also Non-Executive Chairman of the Board of cement, concrete, aggregates, lime and other construction materials Holds no shares in KMG or its subsidiaries and associates (directly of Directors at Sound Energy plc and Executive Director on the Board after a series of mergers and acquisitions. In 2001, he joined Jerónimo or indirectly) and is not involved in any transactions therewith. Holds no shares in KMG or its subsidiaries and associates (directly Martins (JM) as CFO and then as CEO. From 2004 to 2010, as he held or indirectly) and is not involved in any transactions therewith. of Directors of Galp Energia, a Portuguese major. In these companies, he served as a member and Chairman of nominations, remuneration, these positions at the JM Group level, Jerónimo Martins’ became one audit, and HSE committees. of the top three market caps in Portuguese stock exchange. In recent years, he worked at Galp Energia as Vice Chairman of the Board Holds no shares in KMG or its subsidiaries and associates (directly of Directors and Head of Refining and Marketing responsible or indirectly) and is not involved in any transactions therewith. for the development of two refineries in Portugal.

Since 2015 he has been Chairman of the Board of Directors at PHAROL.

116 117 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

BOARD ACTIVITIES DURING 2019 CHAIRMAN OF THE BOARD SUCCESSION PLANNING

The Board of Directors had 18 meetings in 2019, reviewing 307 In 2019, the Board of Directors placed particular focus OF DIRECTORS AND HIS ROLE FOR THE BOARD OF DIRECTORS, issues. on updating the Company’s Development Strategy, ensuring its Committee meetings: financial stability, overseeing investment project management Chairman of the Board of Directors is responsible for providing INDUCTION AND DEVELOPMENT • The Finance Committee (FC): 5 individual meetings, 46 issues and sustainability issues, improving corporate governance, overall leadership for the Board of Directors, ensuring that • The Strategy and Portfolio Management Committee internal audit and risk management, developing management the Board of Directors fully and effectively fulfils its main roles KMG is developing a succession programme for members (SPMC, formerly the Strategy and Innovation Committee): 5 KPIs, and driving digital transformation as well as safety and builds a constructive dialogue between Board members, of the Board of Directors, which is linked to the development individual meetings, 125 issues and well-being of employees. major shareholders and the Management Board. of a similar programme for the Management Board. The project • The Nomination and Remuneration Committee (NRC): 7 is expected to be completed in 2020. individual meetings, 99 issues • The Audit Committee (AC): 9 individual meetings, 110 issues KMG has in place an Induction Programme for newly elected • The Health, Safety, Environment and Sustainable INDEPENDENT DIRECTORS members of KMG' Board of Directors, approved by KMG’s Development Committee (HSE & SD Com): 3 individual Board of Directors dated 23 February 2017. In March 2019, meetings, 36 issues AND THEIR ROLE the Programme was amended by resolution of the Board of Directors based on the results of the review of best practices Independent directors meet all statutory independence criteria, in corporate governance. In particular, the performance in com-

NUMBER OF MEETINGS NUMBER OF ISSUES REVIEWED as well as the requirements of the procedure for selecting pleting the Induction Programme for newly elected members

5 100 independent directors at the Fund's companies and the KMG of the Board of Directors will now be taken into account when Code of Corporate Governance. assessing the performance of the Board members. 4 80 In line with global best practices, the Company seeks to ensure The Corporate Secretary conducts monitoring 3 60 that its independent directors meet the high standards, of the Programme implementation, i.e. its actual completion 2 40 and hereby declares that there are no other circumstances by all newly elected members of the Board of Directors. During which are likely to impair, or could appear to impair, its directors’ 2019, Anthony Espina and Luís Maria Viana Palha da Silva, 1 20 independence. newly elected members of the Board of Directors, completed 0 0 the Programme, including site visits to a number of production FC SMPC NRC HSE&SD AC BoD FC SMPC NRC HSE&SD AC BoD facilities.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 LIABILITY INSURANCE Members of the Board of Directors are trained on a reg- ular basis in accordance with an approved programme. In accordance with the established internal standards On 1 July 2019, all members of the Board of Directors took Actual attendance by Board members at Board and Committee meetings and in line with global best practice, KMG takes out an annual part in the themed training “Global Trends in Sustainable third-party liability insurance policy covering the Company’s Development and Their Impact on Organisations” organised Members of the Board Board and Committee meetings in 2019 officers, including members of the Board of Directors. by Ernst & Young. of Directors Board Audit Nomination Strategy Finance Health, Safety, Environment KMG maintains an annual liability insurance policy covering of Directors Committee and Remuneration and Portfolio Committee and Sustainable Committee Management Development Committee members of the Board of Directors and the Group’s officers Committee throughout the year. The insurance policy provides financial protection to directors and officers against possible claims MANAGING CONFLICTS OF INTEREST Christopher John Walton 18/18 – 7/7 5/5 5/5 3/3 arising as a result of unintentional and/or erroneous Stephen James Whyte 18/18 9/9 7/7 5/5 5/5 3/3 actions by officers. A D&O policy covers legal defence costs The Board of Directors and, above all, independent directors Philip John Dayer 18/18 9/9 7/7 5/5 5/5 3/3 for directors, as well as financial expenses incurred as a result are actively involved in discussing issues where a potential Luís Maria Viana Palha 11/11 5/5 4/4 3/3 3/3 2/2 of any claim against directors arising as a result of their office. conflict of interest may arise (preparation of financial and non- da Silva1 financial statements, approval of interested-party transactions, Baljeet Kaur Grewal 18/18 – – 5/5 5/5 – The Group selects a local insurer through a competitive bidding nomination of candidates to the executive body, remuneration process, with a mandatory requirement to have at least for members of the executive body, etc.). All Board Committees Uzakbay Karabalin 18/18 – 7/7 5/5 – 2/3 95% of the risk reinsured in a market with a reliability rating are currently chaired by independent directors, and the Audit Almasadam Satkaliyev 18/18 – – – – – of at least “A–” as per the Standard & Poors’ scale. Committee is comprised of independent directors only. Anthony Espina2 11/11 – 4/4 3/3 3/3 – Alik Aidarbayev 18/18 – – – – – The insured amount (liability limit) is USD 100 mln, In addition, Philip Dayer is the Non-Executive chairman of VTB with worldwide insurance cover. Capital plc (“VTB”) and from time to time KMG engages VTB’s Note: The first figure shows the number of meetings attended by a member of the Board of Directors, and the second figure is the total number of meetings advisory services. In those cases, Philip Dayer has no part they were entitled to attend The Group’s D&O policy terms and conditions in the decision to engage VTB and he will receive no direct are in line with the national and global best practices in director or indirect benefit from any such engagement. and officer liability insurance. There are no conflicts of interest related to the service of members of the Board of Directors or Management Board on governing bodies of other organisations.

1. Elected to the Board of Directors of KMG as a member /an independent director of KMG on April 29, 2019. 2. Elected to the Board of Directors of KMG as a member/representative of Samruk-Kazyna JSC on May 20, 2020.

118 119 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

PERFORMANCE ASSESSMENT OF THE BOARD OF DIRECTORS BOARD COMMITTEE PERFORMANCE In accordance with the KMG Corporate Governance Code, Therefore, an independent consultant will conduct the Board of Directors, Board Committees, and Board members an independent performance assessment in the first half are evaluated annually through a structured process approved of 2020. Its results are to be reviewed in depth at a meeting REPORT by the Board of Directors. The process needs to be in line of the Nomination and Remuneration Committee of the Board with the Fund's relevant methodology. In addition, at least of Directors. once every three years the performance assessment process is run with the involvement of an independent professional Independent consultant is solely an external provider of perfor- Members of the Board of Directors involved in the activities of Board Committees focus on in-depth review organisation. mance assessment services for the Board of Directors and has and analysis of interrelated functions, issues, and areas. Committee meetings involve invited experts, business no other connection with the Company or individual members leaders, and other stakeholders. Committees make recommendations to the Board of Directors to support its In 2020, the Board of Directors carried out a self-assessment of the Board of Directors or the Management Board. decision making. and in accordance with the KMG Corporate Governance Code, KMG plans to involve an independent professional organisa- Roles and responsibilities of the Board Committees tion in the performance assessment process for the Board of Directors, Board committees, and Board members. Committee Responsibilities Strategy and Portfolio The Committee assists the Board of Directors by considering and making recommendations on: Management Committee • the development strategy and investment policy, including priority areas; • improving investment attractiveness; CORPORATE SECRETARY • effective financial and business planning at KMG; • monitoring KMG’s transformation. Nomination and Remuneration The Committee assists the Board of Directors by considering and making recommendations on: The Corporate Secretary’s main role is ensuring regular Committee • succession planning for the Board of Directors and Management Board; • conducting ongoing, objective performance assessments of the Board of Directors, Management communication between KMG and its shareholders; between Board, Corporate Secretary, and other employees; shareholders and the Board of Directors, the Internal Audit • pursuing effective HR, pay and remuneration policies, and providing social support, professional Service, the Management Board and other bodies within KMG; development, and training opportunities for KMG officers and employees. and between KMG and its key subsidiaries and associates. Finance Committee The Committee assists the Board of Directors in pursuing an effective financial policy at KMG by considering and making recommendations on: The Corporate Secretary’s key responsibilities include assisting • conducting an effective ongoing assessment of KMG’s financial position; the Board of Directors and shareholders in making timely, high- • monitoring KMG’s leverage, financial structure, and financial strategy to achieve short-term and long-term strategic objectives and plans; quality corporate decisions; acting as an adviser to the Board • pre-reviewing and overseeing the implementation of investment projects. members on any matter related to their roles or the applicability Audit Committee The Committee assists the Board of Directors by considering and making recommendations on: of the KMG Corporate Governance Code’s provisions, • implementing effective controls over KMG’s financial and business operations; and monitoring the implementation of the KMG Corporate • monitoring the reliability and effectiveness of internal controls and risk management, as well Governance Code. The Corporate Secretary is responsible as the implementation of corporate governance regulations; for practices of the corporate governance improvement process • overseeing its external and internal audit functions; Damir Sharipov at KMG. The Corporate Secretary is a Company employee acting • reviewing the Company’s annual and quarterly financial statements; • monitoring KMG’s compliance arrangements. Nationality: Republic of Kazakhstan independently and reporting to the Board of Directors. Health, Safety, Environment The Committee was established towards the end of 2018 to assist the Board of Directors on: Date of birth: 22 January 1980 and Sustainable Development • ensuring HSE compliance; Education: Committee • embedding sustainability in strategic planning and social and economic development at KMG; • KMG’s social commitments and programmes under subsoil use contracts; • Al-Farabi Kazakh National University (International Relations • monitoring KMG’s environmental performance. Department), majoring in international law. • Certified Corporate Secretary, certified trainer in corporate governance for corporate secretaries, trainer at Samruk-Kazyna Corporate University.

Experience: Between 2001 and 2007, he held various jobs working at the Tengiz field in the Atyrau Region. Moreover, from 2007 to 2014, he served in different capacities at JSC Development Bank of Kazakhstan, KMGand JSC KazTransGas. Since 5 January 2015, he has been Corporate Secretary at KMG.

Damir was appointed the Corporate Secretary at KMG on 5 January 2015.

On 1 February 2019, Damir Sharipov was elected to the Corporate Secretaries Committee of the National Council for Corporate Governance at the Presidium of the National Chamber of Entrepreneurs of the Republic of Kazakhstan Atameken and on 16 December 2019, he joined the National Association of Corporate Secretaries (Russia).

120 121 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

FINANCE COMMITTEE NOMINATION AND REMUNERATION COMMITTEE

In 2019, the Finance Committee held five meetings and reviewed In 2019, the Nomination and Remuneration Committee held about 46 issues. seven meetings and reviewed about 99 issues.

Members: Members: 1. Christopher John Walton – Chair since August 2017; 1. Luís Maria Viana Palha Da Silva –Chair since June 2019; 2. Stephen James Whyte – Member since August 2017; 2. Philip John Dayer –Member since May 2018; 3. Baljeet Kaur Grewal - Member since August 2017; 3. Christopher John Walton –Member since August 2017; 4. Philip John Dayer- Member since May 2018; 4. Stephen James Whyte - Member since August 2017; 5. Luís Maria Viana Palha Da Silva - Member since June 2019; 5. Uzakbay Suleimenovich Karabalin - Member since August 6. Anthony Espina - Member since June 2019. 2017; 6. Anthony Espina –Member since June 2019.

STATEMENT BY THE CHAIRMAN OF THE FINANCE KEY ISSUES REVIEWED BY THE FINANCE STATEMENT BY THE CHAIRMAN OF THE NOMINATION COMMITTEE COMMITTEE IN 2019 AND REMUNERATION COMMITTEE

In 2019, the Committee coordinated KMG’s efforts to improve • Financial stability (at each meeting), including: In 2019, the Committee focused on pursuing effective With strong emphasis on social responsibility and inclusion, its financial position, including its financial stability. The most – scenario planning of cash flows taking into account oil HR, pay and remuneration policies, succession planning the Committee will continue to ensure that social issues, critical deals designed to reduce KMG’s net debt and improve prices, key liabilities of KMG and KMG Group, progress and providing social support, professional development, including situations of social tension in the regions, its liquidity included an earlier repayment made as part on social projects, etc. and training opportunities for KMG officers and employees. unemployment issues, as well as the Company's social of prepayments for crude oil supplies of TCO. – measures to improve the financial and monetary stability The Committee also addressed issues within its competence support programs for both KMG employees and employees of KMG and KMG Group related to the membership of KMG’s Board of Directors of subsidiaries are addressed. Financial stability is regularly reviewed by the Finance – management of liabilities and liquidity, including and that of its committees, including to ensure compliance Committee, prompting in-depth, insightful discussions by revising Eurobond offering terms with the recommendations to appoint individual independent Luís Maria Viana Palha da Silva with a focus on assessing the impact that various oil price – optimisation of KMG’s capital structure and transfer directors as Committee Chairs. The Committee specifically Chairman of the Nomination and Remuneration Committee scenarios may have on KMG’s liquidity, implementation pricing focused on issues related to the Management Board, Independent Director and financing of significant investment projects, M&A deals, etc. – limits on the balance sheet and off-balance sheet supervisory boards and executive bodies of KMG’s subsidiaries, The Finance Committee also addressed the revision of certain liabilities for counterparty banks of KMG and on developing key performance indicators for KMG Group’s covenants under Eurobonds previously issued by KMG. • Value chains of KMG in the Oil and Oil Products and Gas executive management. The Finance Committee regularly makes recommendations segments for 2020–2024 on various approaches to financial reporting. • Certain aspects of a potential IPO by KMG A skills and expertise matrix was first designed and approved • Investor engagement by KMG in 2018 to maintain an appropriate balance of skills C. J. Walton and expertise on the Board of Directors. The matrix was Chairman of the Finance Committee of the Board of Directors reviewed in March 2019 to reflect the refreshed membership Independent Director of the Board. In November 2019, a consolidated matrix completed by members of the Board of Directors was submitted to the Committee for review, with a recommendation to use the matrix in recruiting candidates to the Board of Directors. Attendance by members at Committee meetings in 2019 The Committee placed a particular emphasis on the employee Committee Meeting No. and date pay and motivation system at KMG, including non-financial members incentives. The Committee also focused on promoting the roles 1/2019 2/2019 3/2018 4/2018 5/2018 Attendance % of the Ombudsman and compliance functions across KMG 06.03.19 08.05.19 02.07.19 02.09.19 05.11.19 Group. Looking forward, we will continue to ensure that KMG S. J. Whyte + + + + + 100 employees work in a supportive, meritocratic and progressive C. J. Walton + + + + + 100 environment. P. J. Dayer + + + + + 100 B. K. Grewal + + + + + 100 L. M. Palha1 + + + 100 A. Espina2 + + + 100

1. Elected to the Board of Directors of KMG as a member /an independent director of KMG on April 29, 2019. 2. Elected to the Board of Directors of KMG as a member/representative of Samruk-Kazyna JSC on May 20, 2020.

122 123 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

KEY ISSUES REVIEWED BY THE NOMINATION STRATEGY AND PORTFOLIO MANAGEMENT COMMITTEE AND REMUNERATION COMMITTEE IN 2019

• Determining the skills, knowledge, and experience required • Monitoring social tension among employees of KMG Group In 2019, the Strategy and Portfolio Management Committee from candidates to KMG’s Board of Directors subject and their contractors, proposed solutions and long-term held five meetings and reviewed 125 issues. to KMG’s current needs and long-term development strategy activities to address relevant issues • Membership of KMG’s Board of Directors • Approval of the standard regulations on the Ombudsman Members: • Committees of KMG’s Board of Directors. Reviewing bids at KMG’s subsidiaries 1. Stephen James Whyte –Chair since May 2018; for the tender for advisory services on the remuneration • Amendments to the Induction Programme for newly elected 2. Christopher John Walton - Member since August 2017; policy and preparing recommendations for KMG’s Board members of KMG’s Board of Directors 3. Uzakbay Karabalin - Member since August 2017; of Directors • Approval of motivational KPI scorecards for KMG managers 4. Baljeet Kaur Grewal - Member since August 2017; • Drafting a work plan for the Nomination and Remuneration and KPI targets for 2019 5. Philip John Dayer - Member since May 2018; Committee of KMG’s Board of Directors for 2020 • Approval of the Training Plan and Professional Development 6. Luís Maria Viana Palha Da Silva - Member since June 2019; • Approval of the Rules for Recruiting and Screening Programme for Members of KMG’s Board of Directors 7. Anthony Espina - Member since June 2019. Candidates to KMG’s CEO-1 • Information on seconding KMG employees • KMG’s KPI Tree for 2020 • Succession planning across KMG Group STATEMENT BY THE CHAIRMAN OF THE STRATEGY AND PORTFOLIO MANAGEMENT COMMITTEE

Attendance by members at Committee meetings in 2019 In 2019, the Strategy and Portfolio Management Committee The Committee identified and supported a material M&A focused on KMG’s long-term strategy, with a particular empha- opportunity as well as reviewing smaller acquisition and divest- Committee Meeting No. and date sis on its gas strategy. The Committee’s overall responsibility ment transaction in the course of the year. members 1/2019 2/2019 3/2019 4/2019 5/2019 6/2019 7/2019 Attendance is ensuring organic and M&A growth of reserves and produc- 04.02.19 06.03.19 06.05.19 02.07.19 30.05.19 23.12.2019 % tion. Particular attention during the year was paid to explora- The Committee amended the procedures to better incorporate tion projects, including M&A opportunities. At every meeting, the need for Ultimate Beneficial owners to be identified in all 06.11.19 07.11.19 the Committee heard progress reports on major fields such transactions as well as requiring Compliance and other reviews P. J. Dayer + + + + + + + + 100 as Kashagan, Karachaganak, and Tengiz, as well as status in all transactions. C. J. Walton + + + + + + + + 100 reports on transformation, privatisation, and divestment pro- S. J. Whyte + + + + + + + + 100 grammes. The Committee continued cross-segment reviews Stephen Whyte U. S. Karabalin + + + + + + + + 100 of the Company’s value chain, designing an adjustment Chairman of the Strategy and Portfolio Management L. M. Palha1 + + + + + 100 plan, and making deep-dives into oil and gas transportation Committee A. Espina2 + + + – + 80 and marketing. Independent Director Ye. U. Baimuratov3 – Resigned from the Committee The Committee also initiated a review of the concept of manag- ing KMG’s subsidiaries and associates via Boards of Directors/ supervisory boards to effectively cascade KMG’s decisions down to its subsidiaries and associates. The Committee continued its extensive involvement in building a new procurement sys- tem that prioritises quality over cost. The Committee strongly focused on building a competitive environment for oil-field services, as well as on increasing accountability for delayed procurement.

In particular, the Committee concentrated on the efforts of LLP KMG Engineering in building competence centres, includ- ing projects for promoting technical competency standards. The Committee reviewed detailed benchmarking to measure losses at Company’s refineries.

Alongside other strategic issues relating to the Board of Directors, the Committee considered opportunities for enhancing KMG’s equity story. The Committee focused on building KMG’s investment portfolio, reflecting project prior- itisation, and establishing criteria for making investment deci- sions, including minimum return requirements, and funding sources and arrangements.

1. Elected to the Board of Directors of KMG as a member /an independent director of KMG on April 29, 2019. 2. Elected to the Board of Directors of KMG as a member/representative of Samruk-Kazyna JSC on May 20, 2020. 3. Left the Board of Directors of KMG on January 4, 2019.

124 125 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

KEY ISSUES REVIEWED BY THE STRATEGY AUDIT COMMITTEE AND PORTFOLIO MANAGEMENT COMMITTEE IN 2019:

• KMG’s gas strategy. Strategy for building a competitive Members: environment for oil-field services 1. Philip John Dayer (Chair) –Chair since May 2018; • Approval of amendments and additions to KMG’s • Production of coal bed methane from the Karaganda Coal 2. Stephen James Whyte - Member since August 2017; Development Strategy Basin 3. Luis Maria Viana Palha Da Silva - Member since June 2019. • Mature field strategy • Updates on KMG’s investment portfolio for 2020–2024 • Approval of the Road Map for KMG’s Digital Transformation • Exploration projects Programme for 2019–2024 • The adoption of a Development project Stage Gate • Transformation Programme of KMG under KMG Group’s Management process to improve project management Privatisation and Divestment Programme performance and capital expenditures planning. • Concept of managing KMG’s subsidiaries and associates via Boards of Directors/supervisory boards. Identifying KMG’s business unit to allocate ownership for aligning KMG’s innovative and budgeting efforts to support R&D or innovation projects CHAIRMAN’S INTRODUCTION • Signing off investment projects • Reviewing the Consolidated Development Plan of KMG The Audit Committee continued to monitor the Company’s I would like to thank each member of the Audit Committee for 2020–2024 system of internal control, risk management and the work of key for their contribution and believe that their expertise • Information on fuel lost or burnt at refineries functions as well as reviewing and challenging as appropriate will be valuable to the work of the Audit Committee in driving • Full cross-segment review of the value chain the disclosures and key judgements made by management. KMG’s performance and financial stability. • Crude oil distribution in the domestic market The Audit Committee fully met the expectations and functional responsibilities set for the Audit Committee by the KMG Philip John Dayer Corporate Governance Code and Audit Committee Terms Chairman of the Audit Committee, Independent Director of reference, as well as decisions of the KMG Board of Directors. Attendance by members at Committee meetings in 2019 We received reports from management and the external auditor each quarter highlighting significant accounting issues Committee Meeting No. and date members and judgements and have used these to inform our debate 1/2019 2/2019 3/2019 4/2019 5/2019 on whether KMG’s financial reporting is fair, balanced Attendance % 05.03.19 07.05.19 03.07.19 03.09.19 05.11.19 and understandable. S. J. Whyte + + + + + 100 C. J. Walton + + + + + 100 P. J. Dayer + + + + + 100 U. S. Karabalin + + + + + 100 ROLE AND KEY RESPONSIBILITIES OF THE COMMITTEE MEETINGS AND ATTENDANCE B. K. Grewal + + + + + 100 L. M. Palha1 + + + 100 The Audit Committee assists the Board of Directors by: The Audit Committee holds regular meetings, including 2 A. Espina + + + 100 • Monitoring the Company’s internal control and risk conference call meetings. There were nine committee meetings management; in 2019. During the year, the Audit Committee reviewed 110 • Overseeing the internal and external audit arrangements; issues, of which 39 were related to an internal audit, 12 related and to external audit, 13 related to risks, and the remaining 46 were • Reviewing the Company’s quarterly and annual financial of other reviews. statements.

Attendance by members at Audit Committee meetings in 2019

Meeting No. and date Committee 1/19 2/19 3/19 4/19 5/19 6/19 7/19 8/19 9/19 Attendance % members 28.01.2019 05.03.2019 01.04.2019 06.05.2019 02.07.2019 02.09.2019 27.09.2019 06.11.2019 19.12.2019

P. J. Dayer + + + + + + + + + 100 L. M. Palha1 + + + + + 100 S. J. Whyte + + + + + + + + + 100

1. Elected to the Board of Directors of KMG as a member /an independent director of KMG on April 29, 2019. 1. 2. Elected to the Board of Directors of KMG as a member /an independent director of KMG on April 29, 2019. Elected to the Board of Directors of KMG as a member/representative of Samruk-Kazyna JSC on May 20, 2020.

126 127 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

ACTIVITIES DURING THE YEAR Key judgements and estimates Audit Committee activity Conclusion / Outcomes FINANCIAL DISCLOSURE The Audit Committee reviewed the quarterly and annual Oil and gas accounting consolidated financial statements with interim management (see notes 4, 13, 15 and 16 to the Consolidated Financial Statements) reports, focusing on: KMG uses technical and commercial judgements to account Reviewed KMG’s commodity price assumptions. Oil and gas assets totaled KZT 1,049.8 bln at 31 December 2019. • Integrity of Group’s financial reporting process; for: exploration; appraisal and development expenditure; • Clarity of disclosure; and, determining estimated oil and gas reserves. Reviewed KMG’s discount rates used for impairment. E&E assets totaled KZT 179.9 bln at 31 December 2019. • Application of accounting policies and judgements Management’s assumptions for future commodity prices impact Reviewed the external expert’s assessment of oil and gas volumes. KMG’s long term oil price assumptions were unchanged As part of this review, the Audit Committee received updates the recoverability of asset carrying values. from 2018. Reviewed brown fields write offs. from management and the external auditor in relation Judgement is required to decide whether it is appropriate E&E impairment of KZT 57.2 bln recognized during 2019. to accounting judgements, financial statements and taxation. to continue to carry intangible assets relating to exploration Reviewed E&E write offs. This represents 100 per cent write-offs of E&E assets where and evaluation (E&E) assets. the contract areas were returned to the Government. EXTERNAL AUDIT Satisfied itself with the impairment testing performed and the impairment charges recognized. The external auditor set out its audit strategy for 2019, identifying significant audit risks to be addressed during Recoverability of assets’ carrying values the course of the audit. These included: (see notes 4, 13 and 15 to the Consolidated Financial Statements) • Impairment of non-current assets Management judgement and estimates on uncertain matters Reviewed the management’s assessment of impairment indicators. Refinery assets totaled KZT 1,381.7 bln at 31 December 2019. • Compliance with debt covenants such as product mix, loss ratios, discount rates, production • Estimation of oil and gas reserves and resources. profiles and the impact of inflation on operating expenses, Satisfied itself with the impairment testing performed During 2019 an impairment charge attributable to property, are required to assess the carrying value of KMG’s refinery cash and the impairment charges recognised. plant and equipment of KZT 144.4 bln was recognised mainly generating units and other long-lived assets. attributable to cash generating units of KMG International, As part of the annual audit of the Company’s consolidated the Satti jackup rig and the Batumi Oil Terminal. financial statements, the Audit Committee requested EY to conduct additional procedures over the Group’s process Provisions of payroll accrual and payment in some subsidiaries. At the date (see notes 4, 26 and 34 to the Consolidated Financial Statements) of this report, the results of those additional procedures have KMG’s significant provisions relate to: decommissioning; Reviewed KMG’s decommissioning assumptions. The decommissioning provision totaled KZT 154.4 bln at 31 not yet been finalized. environmental matters; and, dispute resolution. December 2019. Reviewed KMG’s discount rates. Decommissioning will occur many years in the future and there The discount rates used to calculate the decommissioning The Audit Committee approved the level of materiality adopted is significant uncertainty surrounding precise requirements. Received a briefing on current significant disputes involving KMG. provision were changed from 2018. In monetary terms, the change by the external auditor for the 2019 audit and also reviewed was not significant. uncorrected audit adjustments. KMG is a party to various legal actions. Management judgement Satisfied itself with the level of provisions. and estimates are required on the merits of any case, Following a decision to resolve a dispute involving KMG Drilling FINANCIAL REPORTING the uncertainty surrounding the result of judicial proceedings and Services by negotiation, a settlement provision of KZT 34.1 bln and the timing of appeal processes. was made during 2019. The Audit Committee considered, among other things, a number of significant issues related to KMG’s financial reporting including: In addition to the above key judgements and estimates, • Key judgements and estimates the Audit Committee reviewed the Group’s compliance with its • Audit Committee activity financing covenants given that compliance has a major impact • Conclusion / Outcomes on the going concern assumption used in the preparation of the financial statements.

Audit appointment and independence Risk and internal control reviews AUDIT AND NON-AUDIT FEES The commission, consisting of the Audit Committee of KMG Improvement of the internal control system and risk The Audit Committee reviews the fee structure, resourcing and Samruk-Kazyna JSC, considers the reappointment management is one of the key tasks for KMG. and terms of engagement for the external auditor annually. of the external auditor once in every three years before making In addition, it reviews the non-audit services that the auditor a recommendation to the shareholders of KMG. The Audit The Audit Committee held regular meetings with the Head provides to the Company on an annual basis. Committee assesses the independence of the external of the risk management department to review significant risks auditor on an ongoing basis and the Audit Partner is required and internal control issues. Fees1 payable to the external auditor for the year were USD 5.3 to rotate every five years. No partner or senior staff associated mln (2018: USD 5.8 mln), including USD 0.4 mln (2018: USD 0.95 with the KMG audit may transfer to the Company. The Audit Committee reviewed and evaluated: the quarterly mln) for non-audit services. Non-audit or non-audit related risk report; the statement of risk appetite; the risk register services consisted of other assurance services. Non-audit services by the external auditor and the risk management action plan; the risk map; risk Provision of any non-audit advisory services by the external tolerance level; key risk indicators; internal controls; auditor is subject to prior approval by the Audit Committee. and, insurance issues. EXTERNAL AUDITOR In addition, the external auditor annually submits The external audit of KMG’s consolidated financial statements a report showing the proportion of non-audit services INTERNAL AUDITS for 2019 was conducted by an independent audit company, EY, in the total amount of services provided to KMG. In accordance Internal audits are carried out by KMG’s Internal Audit Service with effect from 19 April 2019, in accordance with the decision with the policy of engaging audit organizations, the proportion (the “IAS”). of shareholders dated 4 March 2019. of non-audit services must not exceed 50% of the total amount. The proportion of non-audit services for 2019 accounted 1. Excluding VAT. for 8.09% of the total accrued amount for audit and non-audit services (see “Audit and non-audit fees”).

128 129 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The activities of the IAS are governed by: Kazakhstan’s laws; auditor, to facilitate an assessment of the external auditor’s KMG’s Charter; decisions of KMG’s governing bodies; internal performance. The assessment was based on the results HEALTH, SAFETY, ENVIRONMENT AND SUSTAINABLE DEVELOPMENT documents regulating the IAS activities; Regulations on KMG’s of a completed questionnaire and a specific discussion between Internal Audit Service; and, Guidelines for KMG’s Internal Audits. members of the Audit Committee with input from the relevant COMMITTEE senior management. The assessment results were reviewed The annual Internal Audit Plan is developed at an Audit Committee meeting and communicated from a consideration of the principal risks confronting KMG, to the external auditor. Members: the audit testing cycle and management requests. The Internal Audit Plan also accommodates ad hoc requests from the Audit As required by the quality assurance and improvement 1. Philip John Dayer – Chair since December 2018; Committee and Management. programme for KMG’ Internal Audit Service, following each 2. Christopher John Walton – Member since December 2018; audit, the audited entity is required to complete a form 3. Stephen James Whyte – Member since December 2018; The Audit Committee not only monitors the IAS’s performance evaluating the IAS’ performance. Results of these assessments 4. Karabalin Uzakbay Suleimenovich – Member since May 2019; but also facilitates professional development of the IAS are consolidated into the IAS annual performance reports 5. Luís Maria Viana Palha Da Silva – Member since June 2019. employees and the management of its talent pool. These issues approved by the Audit Committee. It is pleasing to note that are covered by the IAS reports and reviewed by the Audit the IAS role and value is appreciated by Management. Committee on a quarterly basis. The quarterly reports detail the progress made by the IAS against a number of objectives COMPLIANCE including obtaining certificates, completing trainings/seminars The Compliance Department engaged an independent budgeted within the IAS training and upskilling programme. international firm of auditors to assist with the work of carrying out a compliance risk assessment, gap analysis and remediation STATEMENT BY THE CHAIRMAN OF THE HEALTH, The high professional level of the IAS employees is a key plan. Good progress was made during 2019 to implement performance driver for KMG’s internal audit function; therefore and embed that plan. In 2020, the Audit Committee reviewed SAFETY, ENVIRONMENT AND SUSTAINABLE training and upskilling are prioritised. the following compliance policies: Code of conduct; Anti-bribery DEVELOPMENT COMMITTEE policy; Conflict of interest; Third party due diligence procedure; Internal audit issues reviewed by the Audit Committee in 2019 and Whistleblowing policy. I am pleased to inform you that the new Health, Safety, was the first oil and gas company in Kazakhstan to have its included: Environment and Sustainable Development Committee was Sustainability Report verified to GRI Standards, obtaining To support the work of the newly established compliance launched under the Board of Directors at KMG in 2019 as part the GRI stamp. According to the KMG Corporate Governance 1. IAS 2018 annual performance report; department, the Audit Committee appointed an independent of KMG’s commitment to the health, safety environment Code and Development Strategy, long-term sustainability is one 2. IAS 2019 annual audit plan; international audit firm to carry out a specific due diligence and Sustainable Development Goals (SDGs). of KMG’s key strategic goals and objectives, which is aligned 3. 2018 KPI scorecards of the IAS head and staff shifted to a pay exercise. with the Fund's vision, the Development Strategy of Kazakhstan, grade system; The Committee had three meetings during the year, reviewing and the global investor community agenda. 4. KMG Internal Audit Service’s quarterly reports, including The Audit Committee monitors the whistle blowing procedures 36 issues related to HSE, strategic management of ESG aspects, reviews of any material findings identified in audit reports and other channels of communication. All whistle blowing and sustainability reporting. The Board of Directors reaffirms its strong focus on ecology, and follow-up on the implementation of internal audit notifications are investigated. environmental protection, health and safety of KMG employees recommendations; Given the particular focus on industrial safety issues, across the Group’s operations, as well as on building a talent 5. Independence confirmation forms for the IAS employees; OTHER ISSUES the Committee conducted in-depth reviews of safety pipeline and committing to universally recognised Sustainable 6. IAS Strategic Plan for 2019–2021; The Audit Committee reviewed the implementation of the Detailed management metrics and methods at each of our facilities Development Goals by delegating these issues to the newly 7. IAS 2019 budget; Action Plan to Improve Corporate Governance at KMG. and at our contractors. The official statistics and work- established Committee. 8. 2019 KPIs for the IAS head and staff; related incident investigations suggest that the majority 9. Appointments and terminations within the IAS; As instructed by the Audit Committee, the IAS runs regular of incidents have recently been linked to contractor activities, Our agenda for 2020, same as last year, will focus on the key 10. Amendments to the IAS 2019 annual audit plan. anonymous surveys on health and safety at each audited entity. emphasising the pressing need for KMG to develop company- themes of safety, health, environmental protection, and ethical The surveys provide valuable insights to KMG’s management, wide capabilities in contractor management. As part behaviour. We will also continue efforts to align the Company’s During the year, as part of the Audit Committee’s oversight including insights into employee expectations regarding health of our efforts to improve stakeholder engagement and enhance sustainability agenda with global best practices. of the reports prepared by the company’s IAS, the Audit and safety. supplier responsibility, we plan to develop and approve Committee decided to engage the forensic accounting a framework document outlining the Company’s core Philip John Dayer services of a major independent international audit firm principles and expectations from stakeholders – the Supplier Chairman of the Health, Safety, Environment and Sustainable to investigate internal control failings disclosed at one HSE Responsibility Code. In this way, we were able to conduct Development Committee of the group’s subsidiaries. That firm’s investigations confirmed an end-to-end review to gain a better understanding of how Independent Director the existence of internal control failings and it produced management takes action to improve safety performance a number of recommendations to remediate those deficiencies. and how we can improve the security culture at all levels The management of the company is currently reviewing those of the organisation. recommendations with the objective of devising an effective remediation plan. Transparency in our sustainability reporting was an important focus during the year, with the Company making certain ASSESSMENTS OF THE EXTERNAL AND INTERNAL AUDIT PROCESS progress. In 2019, we were the first oil and gas company PERFORMANCE in Kazakhstan to publish a report on greenhouse gas (GHG) In 2019, surveys were run among members of the Audit emissions (Scope 1, 2 and 3) under the Carbon Disclosure Committee and units of KMG interacting with the external Project (CDP). We were assigned a “C” rating, outperforming our international peers on this measure. We also continue publishing our Sustainability Reports, and in 2019 KMG

130 131 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

KEY ISSUES REVIEWED BY THE COMMITTEE IN 2019: DOCUMENTS AND REGULATIONS REVIEWED AND APPROVED BY THE COMMITTEE IN 2019: • Improving the transparency and quality of reporting MANAGEMENT BOARD PERFORMANCE by business units, and more effective management of issues relating to the Committee • KMG 2018 Sustainability Report • Obtaining ESG ratings from reputable international rating • KMG Group’s Sustainability Management Guidelines REPORT agencies • KMG’ Occupational Health and Safety Policy • Independent audit and verification of KMG’s 2018 • KMG’ Environmental Policy Sustainability Report • KMG’ Policy on Alcohol, Narcotic Drugs, Psychotropic • Identification of potential safety threats, prevention of high- Substances and their Analogues MANAGEMENT BOARD’S ACTIVITIES IN 2019 risk employee health and safety incidents • KMG’ Policy on Safe Operation of Land Vehicles • Accounting for climate risks, such as water risk, GHG • KMG Group’s corporate standard for engaging contractors The Management Board is a collective executive body in charge During 2019 – 2020, there were the following changes risks, flaring risk, and risks associated with changes on HSE of KMG’s day-to-day operations, as well as the development in the Management Board: in Kazakhstan’s environmental laws • KMG Group’s corporate standard for building HSE and implementation of the overall development strategy • Dmitry Salov, Managing Director for Information Technology, • Contractor engagement on HSE, and increasing supplier capabilities of the Company’s subsidiaries. KMG’s Management Board is led Transformation and Digitalization, left the Management Board responsibility by Chairman of the Management Board. in September 2019; • Conducting specialised internal HSE audits and review • Yessen Kairzhan Managing Director for Procurement of audit results The most significant issues considered by the Management and Supplies, left the Management Board in February 2020; • Detailed analysis of environmental fines and penalties Board are: • Dastan Abdulgafarov, Deputy Chairman of the Management imposed on KMG Group, and review of corrective actions • Developing and implementing the Company’s current Board for Strategy, Investment and Business Development, • Taking a holistic view of waste management: waste business policy; was appointed as the Member of the Management Board accounting, identification and disposal of different types • Developing, approving, and monitoring the execution in February 2020; of waste across KMG Group of the Company’s quarterly, annual, and long-term activity • Malik Saulebay, Managing Director for Legal Support, • Embedding the UN Sustainable Development Goals (SDGs); plans, budget, and investment programme; was appointed as the Member of the Management Board • Establishing a balanced framework of sustainability KPIs • Making decisions on the establishment by the Company in February 2020. for the Company and individual managers of other legal entities, as well as on acquisitions and disposals • Investigations and prevention of fatalities, traffic accidents of equity interests in other entities; In 2019, the Management Board held a total of 54 meetings, and safety incidents, applying sanctions to managers based • Issues related to designing and implementing the overall reviewed and approved 660 resolutions, 649 of them at in-person on incident investigation results development strategy of the Company’s subsidiaries. meetings. 162 issues were passed on to be reviewed by the Board • Defining leadership in environmental protection of Directors. The most important of them are: signing new and management, participation in drafting Kazakhstan’s The Management Board is formed by the Board of Directors fol- agreements on subsoil use and approving investment projects; environmental laws lowing the proposals of the Chairman of the Management Board, disposing of non-core assets; implementing the Company’s • Culture, training and accountability of managers and comprises ten key managers of the Company. Strategy and Development Plan; improving financing terms; and employees of KMG and its subsidiaries approving quarterly risk reports and the Sustainability Report.

MANAGEMENT BOARD

Attendance by members at Committee meetings in 2019

Сommittee members Meeting No. and date

1/2019 2/2019 3/2019 Attendance % 05.03.19 02.09.19 05.11.19 P. J. Dayer + + + 100 Alik Aidarbayev Zhakyp Marabayev Kurmangazy Iskaziyev Kairat Sharipbayev Daniyar Tiyesov C. J. Walton + + + 100 Chairman of KMG’s Deputy Chairman Deputy Chairman Deputy Chairman Deputy Chairman S. J. Whyte + + + 100 Management Board of the Management of the Management of the Management Board of the Management U .S. Karabalin + + 100 Board — Chief Operating Board for Geology for Gas Transportation Board for Oil Refining L. M. Palha1 + + 100 Officer and Exploration and Marketing and Marketing

Daniyar Berlibayev Dauren Karabayev Dastan Abdulgafarov Dauletzhan Khassanov Malik Saulebay Deputy Chairman Deputy Chairman Deputy Chairman Managing Director Managing Director of the Management Board of the Management of the Management for Human Resources for Legal Support for Oil Transportation, Board – Chief Financial Board for Strategy, International Projects, Officer Investment and Business and Construction Development 1. Elected to the Board of Directors of KMG as a member /an independent director of KMG on April 29, 2019. of the Saryarka trunk gas pipeline

132 133 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

MEMBERSHIP OF THE MANAGEMENT BOARD

Alik Aidarbayev Zhakyp Marabayev Kurmangazy Iskaziyev Kairat Sharipbayev Chairman of KMG’s Management Board Deputy Chairman of the Management Board — Chief Operating Deputy Chairman of the Management Board for Geology Deputy Chairman of the Management Board for Gas Officer and Exploration Transportation and Marketing A member of the Board of Directors. A member of the Management Board since 2019 A member of the Management Board since 2018 A member of the Management Board since 2016

112 For more details see the Membership of the Board of Directors section Date of birth: 9 August 1962 Date of birth: 11 May 1965 Date of birth: 16 August 1963 Education: Education: Education:

• Mining, the Gubkin Russian State University of Oil and Gas • Mining Engineering, Kazakh Polytechnic Institute named after V. I. • Kazakh National Agrarian University • State University of Management (Moscow, Russia) Lenin • Kazakh National Pedagogical University named after Abai • Candidate of Geological Sciences, Tomsk Polytechnic University • Candidate of Political Sciences (Russia)

Experience Experience Experience Zhakyp Marabayev began his career as Head of Engineering Kurmangazy Iskaziyev began his career at the Balykshinsk Exploratory Kairat Sharipbayev began his career in 1985 as an agronomist at the Upstream Unit of Komsomolskneft in 1984. At different periods Drilling Unit as an operator and a member of the drilling expedition in the agricultural sector. From 1991 to 1999, he held various he served as Director for Commerce at Sphinx (a state-owned No. 1. Then he worked as a cementing shop operator at Embaneft management positions at Koktem LLP, JSC Shyn-Asyl and Zhetisu corporation), Head of Hydrocarbons and Petrochemicals and Deputy Association, Grade II Geologist and Chief Geologist of the Central LLP. At different periods he served as Deputy Akim of Taraz, First Head and Chief Engineer at the Ministry of Foreign Economic Relations Dispatch Office of Atyrau Drilling Operations Division at OJSC Vice President of CJSC Dauir, President of Kitap Publishing House of the Republic of Kazakhstan and Head of Offshore Activities Embamunaigas, Chief Geologist and Deputy Director at Atyrau and Chairman of the Board of Directors of JSC Danko. at the Ministry of Energy and Mineral Resources of the Republic Department of Enhanced Oil Recovery and Well Overhaul, and Director of Kazakhstan. of the Department of Geology and Oil and Gas Field Development In 2001, he began working in oil, gas and gas supply as he joined at OJSC Embamunaigas. CJSC Intergas Central Asia as Director of the Gas Transportation Other senior management positions included Vice President and CEO and Marketing Department and then Deputy General Director of JSC KazakhstanCaspiShelf, Director for Investments and New At different periods he served as Deputy Director and Director for Marketing and Commerce. Later he was Adviser and Deputy Projects and Commercial Director at CJSC NOGC Kazakhoil, Vice of the Department of Geology and Oil and Gas Field Development General Director for Marketing at CJSC KazTransGas, Adviser to First President for Gas Projects at CJSC NOGC Kazakhoil, Deputy Chairman at JSC KazMunaiGas Exploration Production, Executive Upstream Vice President, and Managing Director for Commerce at JSC NC and a member of the Management Board of CJSC , Vice Director, Managing Director for Geology, Geophysics and Reservoirs Kazakhstan Temir Zholy, CEO of JSС KazTransGas Aimak, CEO of JSC President for Operation at JSC KazTransOil, Vice President of CJSC and Chief Geologist at KMG, Deputy Chairman of the Management KazTransGas, Deputy Chairman of the Management Board for gas NOGC Kazakhoil, Deputy CEO of CJSC NC Oil and Gas Transportation, , Board for Geology and Prospective Projects at KMG, Managing Director transportation and marketing at KMG. Chairman of PSA Share Managing Authority at Karachaganak Petroleum for Non-Operating Assets (Tengiz, Kashagan, Karachaganak), Managing Operating B.V., CEO of JSC KazMunaiGas Exploration Production, Director for Geology, CEO (Chairman of the Management Board) of JSC Chairman of the Board of Directors of JSC KazTransGas since 11 Managing Director of KMG and Chairman of the Board of Directors Embamunaigas and CEO (Chairman of the Management Board) of JSC December 2015. of JSC KazMunaiGas Exploration Production. KazMunaiGas Exploration Production. Holds no shares in KMG or its subsidiaries and associates (directly From November 2006 to December 2008, he worked at KAZENERGY Holds no shares in KMG or its subsidiaries and associates (directly or indirectly) and is not involved in any transactions therewith. Association as Chairman of the Coordination Council and subsequently or indirectly) and is not involved in any transactions therewith. at North Caspian Operating Company N.V. as Deputy Managing Director until February 2019.

Holds no shares in KMG or its subsidiaries and associates (directly or indirectly) and is not involved in any transactions therewith.

134 135 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Daniyar Tiyesov Daniyar Berlibayev Dauren Karabayev Dastan Abdulgafarov Deputy Chairman of the Management Board for Oil Refining Deputy Chairman of the Management Board for Oil Deputy Chairman of the Management Board – Chief Financial Deputy Chairman of the Management Board for Strategy, and Marketing Transportation, International Projects and Construction Officer Investment and Business Development of the Saryarka trunk gas pipeline A member of the Management Board since 2016 A member of the Management Board since 2016 A member of the Management Board since 2020 A member of the Management Board since 2019 Date of birth: 6 December 1970 Date of birth: 11 June 1978 Date of birth: 16 December 1974 Date of birth: 21 December 1968 Education: Education: Education: Education: • Engineering, Atyrau University of Oil and Gas • International Economic Relations, the Kazakh State Academy • Republican Physics and Mathematics School named after Zhautykov • Law, East Kazakhstan State University • Law, Al-Farabi Kazakh National University of Management • International Law, Kazakhstan Institute of Law and International • Master of Science in Finance, Texas A&M University Relations • CFA Charter holder • International Economics and Law, Diplomatic Academy of the Ministry of Foreign Affairs of the Republic of Kazakhstan • Master of Petroleum Business, ENI Corporate University (Milan) Experience Experience • Executive MBA (Finance and Investments), Moscow School of Management Skolkovo In 1994, Daniyar Tiyesov started working as a manager at Manas, Between 1991 and 1994, Daniyar Berlibayev worked first as a junior then at Bata LLP and later as an executive director at Abyz LLP. research fellow at the Kazakh branch of the Academy of Sciences At different periods he was Assistant to First Vice President, Secretary of the Soviet Union, then as a legal consultant and Head of the Legal of the Board of Directors of OJSC Atyrau Refinery, Chief Manager Unit at Barikon. At different periods he was Chief Specialist in Project Experience Experience at CJSC NOGC Kazakhoil, Deputy Chief Manager of the group Assessment Management at the National Foreign Investment Agency, managing the renovation of the Atyrau Refinery, Head of the day- Deputy Head of the National Foreign Investment Agency at the Ministry Dauren Karabayev began his career as a credit analyst at ABN AMRO At different periods he worked as a lawyer in the international to-day Operations Control Sector, Chief Specialist in Corporate of National Economy of the Republic of Kazakhstan, Head of the Legal Bank Kazakhstan in 2001 and was promoted to Head of the Credit contract department, Сhief Manager of the new projects development Management and day-to-day Operations Monitoring at the Atyrau Expertise Directorate of the Legal Department, and then Deputy Department in 2003. department, Director of the new projects development department, Refinery Management Department, Deputy Director of the Oil Director of the Legal Department at the State Export-Import Bank Deputy director, then Director of the new offshore projects and Gas Refining and Petrochemicals Department, then Deputy of the Republic of Kazakhstan (Ex-Im Bank). In 2004, he came to Halyk Bank as Managing Director and was Deputy development department, Head of the project management group Director of the Petrochemicals Development Department at CJSC Chairman of the Management Board from 2007 to June 2016. at KMG and JSC “MNC KazMunaiTeniz”. He held position as an Advisor NC KazMunaiGas, Head of Capital Construction Management, CEO Since 1997 Daniyar Berlibayev has been working for KMG Group. of the General Director, Managing Director for Business Development At CJSC KazTransOil, he was Head of the Investment Projects Until September 2016 he worked as an engagement manager and CFO of the Enterprise Under Construction Directorate of Atyrau at McKinsey & Company. and Deputy General Director for Economics and Finance at JSC Refinery LLP. Department, Head of the Corporate Finance Department, Executive KazMunaiGas Exploration Producion, Managing Director for support Director for Finance as well as Finance and Economics Adviser. Since 2017, he is a Chairman of the Board of Directors of the exploration and production business, Head of Staff - Managing At different periods he was Deputy COO of JSC KazMunaiGas At different periods he was Vice President, Deputy General Director of JSC KazMunaiGas Exploration Production that has been listed Director for Development at KMG. Trading House, Deputy Chairman of the Management Board for Economics and Finance, and First Vice President at CJSC on the London Stock Exchange. for Refining, Petrochemicals, Managing Director for Oil Refining KazTransGas, Deputy CEO at CJSC Intergas Central Asia, First Deputy Has experience in KMG group of more than 18 years, of which 14 years and Marketing, Deputy Chairman of the Management Board for Oil CEO at CJSC NC Oil and Gas Transportation, First Deputy CEO at CJSC Holds no shares in KMG or its subsidiaries and associates (directly in senior positions. Refining and Marketing at KMG, CEO of JSC KazMunaiGas – Refining KazTransGas, Managing Director for Corporate Governance at CJSC or indirectly) and is not involved in any transactions therewith. and Marketing, Senior Vice President of KMG, and Executive Vice NC KazMunaiGas, Deputy Director for Corporate Development at CJSC Holds no shares in KMG or its subsidiaries and associates (directly President for Oil Transportation, Refining and Marketing of KMG. KazTransGas, Managing Director for Finance and Economics at CJSC or indirectly) and is not involved in any transactions therewith. NC KazMunaiGas, and CEO of CJSC NMSC Kazmortransflot. From 2005 Holds no shares in KMG or its subsidiaries and associates (directly to 2007, he served as First Deputy CEO at JSC KazTransGas and CEO or indirectly) and is not involved in any transactions therewith. of JSC Intergas Central Asia.

At different periods he served as Vice President of Midstream and Downstream at KMG, Managing Director of Gas Projects and CEO of JSC KazMunaiGas – Refining and Marketing, CEO of JSC KazTransGas, Managing Director for Gas Projects at KMG, First Deputy Chairman of the Management Board at KMG, Deputy Chairman of the Management Board for the Corporate Centre.

Holds no shares in KMG or its subsidiaries and associates (directly or indirectly) and is not involved in any transactions therewith.

.

136 137 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

REMUNERATION REPORT

REMUNERATION OF THE BOARD OF DIRECTORS

The Resolution of the Fund’s Management Board dated 26 • As members of: September 2016 approved the Guidelines on Forming Boards – the Audit Committee – USD 17,500 per year of Directors at the Fund’s companies, which provide, inter – the Strategy and Portfolio Management Committee – USD alia, for a procedure for remuneration payable to members 12,500 per year of such Boards of Directors. Remuneration reflects the duties – the Nomination and Remuneration Committee – USD of the respective member of the Board of Directors, the scale 12,500 per year Dauletzhan Khassanov Malik Saulebay of the company’s operations, and its long-term goals – the Finance Committee – USD 12,500 per year Managing Director for Human Resources Managing Director for Legal Support and objectives. Remuneration is also paid to independent – the Health, Safety, Environment and Sustainable directors. The level of remuneration payable to representatives Development Committee – USD 12,500 per year. A member of the Management Board since 2018 Member of the Management Board since 2020 of the Fund on such Boards is determined by a resolution Date of birth: 21 October 1971 Date of birth: 7 May 1975 of the Fund’s Management Board. For participating in a meeting initiated by Chairman of KMG’s Board of Directors, Chairman of the Management Board Education: Education: Independent Directors Christopher John Walton, Philip John of Samruk-Kazyna JSC, and/or Chairman of KMG’s Management • Economics, West Kazakhstan Agricultural University • Republican Physics and Mathematics School named after Zhautykov Dayer, Stephen James Whyte and Luís Maria Viana Palha da Board, Independent Directors Baljeet Kaur Grewal and Anthony • Mining Engineering, Atyrau University of Oil and Gas • Economics, Kazakh State Academy of Management Silva, and Board Members Baljeet Kaur Grewal and Anthony Espina receive USD 2,000 per meeting, with no more than one • Law, Kazakh Academy of Labour and Social Relations Espina receive a fixed annual remuneration of USD 150,000 meeting held per day. • MBA with first-class honours, Gubkin Russian State University of Oil each, while a member of the Board of Directors Uzakbay and Gas Karabalin receive a fixed annual remuneration of KZT 18.2 mln. Neither KMG, nor any entity of the group that KMG is part of, issued loans to members of the Board of Directors during In addition, independent directors and members of the Board the year. Experience Experience of Directors Baljeet Kaur Grewal and Anthony Espina receive At different periods Dauletzhan Khassanov served as Deputy 25 years of professional experience additional remuneration as follows: Chief Accountant at JSC Teniz, Chief Accountant at the Kurmangazy district telecom centre of OJSC , Deputy Chief Malik Saulebay started his career in 1995 and until 2000 held various • As Сhair of KMG’s Board of Directors – USD 75,000 per year; Accountant at OJSC Ozenmunaigas and OJSC Embamunaigas, Chief positions in the banking industry (leading economist and Deputy • As Chairs of: Department Director at Kazpochtabank, senior accountant/controller Accountant at JSC Caspi Neft and Eurasian Group LLP, Deputy – the Audit Committee – USD 35,000 per year Director for Economics and Finance, Director of the Finance at JSC ALFA-BANK, Head of Directorate at OJSC TransAsian Trade – the Nomination and Remuneration Committee – USD Department, and Deputy Chief Accountant at a production unit of JSC Bank), and from 2000 to 2005 – in public prosecutions (prosecutor Embamunaigas and at JSC KazMunaiGas Exploration Production. at the Prosecutor’s Office in the City of Astana, Almatinsky District, 25,000 per year Assistant to Deputy General Prosecutor and Head of Directorate – the Finance Committee – USD 25,000 per year He also acted as Deputy General Director for Economics at the Prosecutor’s Office in the City of Astana and the Transport and Finance at JV Kazgermunai LLP, Share Managing Director Prosecutor’s Central Regional Office). Malik Saulebay has a breast – the Strategy and Portfolio Management Committee – USD at JVs of JSC KazMunaiGas Exploration Production, a part-time badge for Excellence in Public Prosecution and in 2005 he successfully 25,000 per year director at Technological Transport and Well Servicing Department passed a qualification exam and was included into the state register – the Health, Safety, Environment and Sustainable LLP, President of JSC Karazhanbasmunai, CEO and Chairman of judges. of the Management Board at JSC Ozenmunaigas, Deputy Development Committee – USD 25,000 per year. CEO, a member of the Management Board and Executive From 2005 to 2006, he served as Deputy Chairman of the Management Director for Exploration and Production Assets Management Board at JSC Kazakhstan Mortgage Company, Head of Directorate at JSC KazMunaiGas Exploration Production, and General Director at the Committee on Insolvent Debtors of the Ministry of Finance for Economics and Finance and a member of the Management Board of the Republic of Kazakhstan. at JSC NMC Tau-Ken Samruk. In 2006, he was Director for Asset Management at JSC KazTransGas; Holds no shares in KMG or its subsidiaries and associates (directly from 2007 to 2009 – CEO of JSC KazTransOil-Service; from 2009 or indirectly) and is not involved in any transactions therewith. to 2011 – Adviser to the CEO, Managing Director for Legal Affairs at JSC KazMunaiGas – Refining and Marketing; from 2011 to 2016 – Managing Director for Legal Affairs, Head of Staff and member of the Management Board at JSC KazMunaiGas Exploration Production; from 2016 to 2018 – Vice President for External and Corporate Relations at JSC Karazhanbasmunai; from 2018 to 2019 – Managing Director for Risk and Legal Affairs, member of the Management Board at JSC Samruk-Energy. Malik Saulebay has served at KMG as Managing Director for Legal Affairs since May 2019 and as a member of the Management Board since February 2020.

Holds no shares in KMG or its subsidiaries and associates (directly or indirectly) and is not involved in any transactions therewith.

138 139 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Actual annual remuneration paid to members of the Board of Directors, in US dollar REMUNERATION OF MEMBERS OF THE MANAGEMENT BOARD Members Fixed annual Annual Annual Annual remuneration Remuneration Total of the Board remuneration remuneration remuneration for Committee membership for participation KMG’s Board of Directors determines the remuneration policy When building the remuneration framework and determining of Directors for BoD for BoD for Committee in individual and the procedure for assessing performance of members the specific remuneration for members of KMG’s Management membership chairmanship chairmanship meetings2 of KMG’s Management Board in line with the Corporate HR Board, the actual amounts payable are expected to be sufficient Management Standard of Samruk-Kazyna Group that was to engage, motivate, and retain persons with skills and expertise Christopher John 150,000 75,000 Finance Nomination and Remuneration 82,000 370,060 approved by the decision of the Management Board of Samruk- required for KMG. Walton Committee – Committee – 12,500 25,000 Audit Committee – 7,583 Kazyna JSC dated December 14, 2017. Strategy and Portfolio The total remuneration paid to members of KMG’s Management Committee Remuneration paid to members of the Management Board Management Board for 2019 amounted to KZT 565,558,538.93 – 12,500 for the reporting period (year) is performance-related including all salaries and financial benefits paid Health, Safet, Environment to encourage them to meet the strategic and priority goals by KMG to members of the Management Board for serving and Sustainable Development Committee – 5,477 outlined in measurable, interrelated, consistent, and balanced on the Board in 2019, as well as the total annual bonus paid motivational KPI scorecards. to members of the Management Board (executives) for 2018 Stephen James 150,000 – Strategy Nomination and Remuneration 20,000 242,977 Whyte and Portfolio Committee – 12,500 under the Remuneration Rules for Members of the Management Management Finance Committee – 12,500 A motivational KPI scorecard outlines corporate and functional Board (executives), Employees of the Internal Audit Service, Committee– Health, Safet, Environment KPIs. and the Corporate Secretary of KMG, approved by Resolution 25,000 and Sustainable Development of KMG’s Board of Directors dated 13 February 2013. Committee – 5,477 Audit Committee – 17,500 Remuneration is determined to provide a reasonable and justified ratio of the fixed and variable parts, depending Philip John Dayer 150,000 – Audit Nomination and Remuneration 34,000 272,732 on KMG’s performance and the employee’s personal Committee – Committee – 17,778 35,000 Strategy and Portfolio contribution. Health, Safety, Management Committee – Environment 12,500 The Nomination and Remuneration Committee of the Board and Sustainable Finance Committee – 12,500 of Directors pre-reviews issues related to building an effective Development Committee – and transparent remuneration framework. 10,954 Luís Maria Viana 100,417 – Nomination Strategy and Portfolio 10,000 154,144 Palha da Silva and Management Committee – 7,083 Remuneration Finance Committee – 7,083 Committee – Audit Committee – 9,917 14,167 Health, Safet, Environment and Sustainable Development Committee – 5,477 Baljeet Kaur 150,000 – – Strategy 92,000 267,000 Grewal and Portfolio Management Committee – 12,500 Finance Committee – 12,500 Uzakbay 47,0281 – – – – 47,028 Karabalin Almasadam – – – – – – Satkaliyev Anthony Espina 91,935 – – Nomination and Remuneration 10,000 123,184 Committee – USD 7,083 Strategy and Portfolio Management Committee – 7,083 Finance Committee – 7,083 Alik Aidarbayev – – – – – –

1. The annual remuneration of Uzakbay Karabalin amounted KZT 18 mln, which is equivalent to USD 47,028 (the average rate of National Bank of Kazakhstan for 2019 amounted to KZT 382.75). 2. Meeting initiated by the Chairman of the BoD and / or the Chairman of the Management Board of Samruk-Kazyna JSC, the Chairman of the Management Board of KMG.

140 141 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CORPORATE CONTROL COMPLIANCE SERVICE

The role of KMG in the national economy requires KMG applies a common group-wide policy In the event of corporate conflicts, the parties attempt to settle Corporate conflicts are addressed by the Chairman of the Board a responsible approach to fostering a favourable business to prevent corruption, embezzlement, and misuse of funds, by negotiation to efficiently protect the interests of KMG of Directors assisted by the Corporate Secretary. If the Chairman environment and is reflected in its approaches towards misappropriation of, or deliberate damage to, inventories, and other stakeholders. of the Board of Directors is involved in a corporate conflict, such corporate governance, including corporate compliance. KMG, misrepresentation and falsification of financial statements cases are addressed by the Nomination and Remuneration therefore, adopts global best practices in compliance when or other documents, abuse of office, negligence or omission, In order to be effectively prevented or addressed, corporate Committee. developing its internal rules and procedures to promote its as well as other offences. conflicts primarily need to be identified as soon and fully strategic objectives in line with applicable laws and ethical as possible, with all corporate governance bodies to act standards, and to mitigate reputational and legal risks that In line with global best practices, KMG has also introduced in a consorted manner. have a significant effect on its business stability, efficiency, anti-corruption clauses in its contracts with independent and integrity. contractors, disciplinary sanctions against employees who fail to comply with corporate regulations and applicable KMG is committed to improve existing corporate standards laws, as well as awareness raising for administrative in line with best global practices in corporate governance. and management staff through compliance trainings INTERNAL AUDIT SERVICE As part of the efforts to ensure the Company’s and its on the principles of the Code of Business Ethics covering employees’ compliance with legal and ethical anti-corruption international and national anti-corruption laws. standards, KMG reviewed risk factors in corporate business The Internal Audit Service (IAS) reports and is accountable In line with the International Standards for the Professional processes to assess the likelihood of potential damage from risk KMG has in place whistleblowing channels administered to KMG’s Board of Directors and supervised by the Audit Practice of Internal Auditing and to ensure the proper occurrence, and assessed performance of existing controls by an independent third-party contractor. In case of any Committee of KMG’s Board of Directors. The activities of the IAS quality of internal audit, the IAS has in place a framework for each potential risk. suspicions or knowledge of a breach of the Code of Business are governed by Kazakhstan’s laws, KMG’s internal documents, for continuous professional development of auditors. Ethics, including corruption, fraud, or non-ethical conduct, and the International Standards for the Professional Practice As a result, 31 of 36 employees of IAS (86%) hold international Integrity and compliance are paramount for every business every employee can report them via a hotline, with such of Internal Auditing. certificates and diplomas, such as: as they enable its successful and sustainable operation, information then forwarded to relevant compliance officers • Certified Internal Auditor: 7 promote zero tolerance to corruption and foster transparency to identify the cause and remedy the breach. The investigation The IAS focuses on providing the Board of Directors • Diploma in International Financial Reporting: 5 and openness within the corporate culture and employee results are presented to the Board of Directors each quarter. with independent and objective information to ensure • Kazakhstan’s Professional Accountant: 10 behaviours and attitudes. These principles are central A total of 28 whistleblowing reports were received via the effective management of KMG and its subsidiaries • Certified Accounting Practitioner/Certified International to the operation of the Compliance Service and lie at the heart the hotline in 2019, including six reports that were confirmed, and associates by employing a systematic approach towards Professional Accountant: 4 of robust corporate governance. with recommendations and answers promptly prepared improving risk management, internal control, and corporate • Certified Professional Internal Auditor: 13 and sent via the independent contractor to the whistleblowers. governance processes. • Certified Fraud Examiner: 2 KMG’s Compliance Service, with a direct functional reporting • Certified Information Systems Auditor: 2 line to the Board of Directors, was launched in 2019. To perform its activities in accordance with the annual audit • Association of Chartered Certified Accountants: 1 The role of the Compliance Service is to ensure compliance plan, the IAS: with mandatory regulations and global best practices • assesses the reliability and effectiveness of applicable in pursuing anti-corruption policies and building corporate internal controls and risk management culture across KMG Group to foster transparency and integrity • assesses the reliability, completeness, and objectivity among its employees, as well as to create a business of the accounting policy as well as financial statements environment aligned with global best practices, internal policies, of KMG and its subsidiaries and associates based on such and Kazakhstan’s laws. The Compliance Service is responsible policies for preventing all existing risks of KMG Group employees being • assesses the efficiency of resource management at KMG involved in corrupt practices in performing their duties. While and its subsidiaries and associates and the methods used being a standalone function within KMG, the Compliance to ensure asset integrity Service is integrated with all of its business units. • monitors compliance with Kazakhstan’s laws, corporate operational, investment, and financial rules and regulations.

The IAS uses audit results to make recommendations on improving KMG’s operations. The IAS consistently monitors and oversees the development and execution of measures to implement its recommendations.

142 143 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The following decisions were made in 2019 to set limits • Further improve our score on Risk Management and Internal RISK MANAGEMENT AND INTERNAL CONTROL for KMG’s counterparty banks: Control within KMG’s target corporate governance rating, • The Management Board approved internal limits implement initiatives under the Detailed CRMS Improvement on the balance sheet and off-balance sheet liabilities for ten Plan for 2020, foster a robust risk culture at KMG Group. Risk management at KMG relies on the corporate risk IMPROVING RISK MANAGEMENT counterparty banks of KMG; management system (CRMS) implemented at all levels across • The Board of Directors set limits for two counterparty banks the Group. The CRMS is a key element of the corporate KMG Group’s efforts to improve its CRMS and drive a robust risk of KMG; CRMS PARTICIPANTS governance system, supporting timely identification, culture are guided by the Detailed Plan for Improving Corporate • Four reports on compliance with the limits set for KMG’s assessment and monitoring of all material risks, as well Governance of KMG for 2019–2020. The Plan outlines key initiatives counterparty banks were approved (as part of KMG’s Risk management at KMG is an ongoing process embedded as timely and adequate mitigation measures. supporting the Company’s CRMS goals. quarterly risk reports). throughout the organisation including its Board of Directors, Management Board, managers and employees. Each officer The CRMS policy of KMG and its subsidiaries outlines KMG has been continuously improving its CRMS and consistently KMG assessed the impact of existing and potential US sanctions is responsible for ensuring risks are properly assessed when the terminology, goals, tasks, main principles of design enhancing its risk management framework. We remain fully against Russia on KMG Group and designed initiatives making decisions. To provide reasonable assurance that and operation, and organisational structure of the CRMS committed to continuous development and improvement to respond to external challenges. A report on the potential strategic and operational goals will be achieved, all CRMS at KMG Group. The purpose of the CRMS is to ensure an optimal of the Company’s CRMS, and in 2019 KMG: impact of the US-China trade conflict on KMG’s operations was participants take steps to identify potential events that can balance between the Company’s growth in value, profitability • refreshed KMG’s Risk Committee; also prepared. impact the Company’s operations and to limit such exposure and risks. • invited the head of the Internal Audit Service to attend the Risk to the levels acceptable to the Company (set levels). Committee meetings as a permanent invited non-voting expert; PLANNED IMPROVEMENTS TO RISK MANAGEMENT IN 2020 • conducted a survey on risk management culture at KMG AND BEYOND CRMS PRINCIPLES with the survey report reviewed by KMG’s Risk Committee; • Automate CRMS processes via the automated risk • approved KMG’s Risk Culture Improvement Action Plan management system across KMG Group; The Company’s risk management is guided by the following for 2020; • Develop risk and control matrices and flowcharts for 24 principles: • had its Board of Directors approve the risk appetite statement, business processes and test (analyse) the design of controls, Risk Register, Risk Management Action Plan, a risk map, risk evaluate the current maturity levels of the ICS across 1. Single methodology: the CRMS processes across all KMG tolerance levels and KMG’s Key Risk Indicator Register for 2020; subsidiaries, coordinate the ICS roll-out across subsidiaries, Group entities are based on unified methodological • approved guidelines on the internal control system train employees; approaches; and business continuity management system; • Develop and approve business continuity plans, test 2. Continuity: the CRMS operates on an ongoing basis; • approved KMG’s Business Process Classifier for 2019, KMG’s the plans and develop improvement recommendations, 3. Comprehensiveness: the CRMS covers all activities Timetable for Developing and Updating Risk and Control evaluate the current maturity levels of the BCMS across of the Company and all types of associated risks; KMG Group Matrices and Flowcharts for 2019 and 2020, KMG’s Corporate- subsidiaries, coordinate the BCMS roll-out across applies relevant controls to all business processes at all Level Risk and Control Matrix, and the roadmap for improving subsidiaries, train employees; management levels; the ICS and BCMS across KMG and its subsidiaries; • Develop and manage the operations of Kazakhstan Energy 4. Accountability: the CRMS organisational structure defines • approved KMG’s Register of Risk Coordinators; Reinsurance Company Ltd. at AIFC and extend the Corporate roles in decision making and risk management control at all • expanded the Corporate Reinsurance Programme by including Reinsurance Programme to new companies; levels across KMG Group; joint ventures, increasing coverage and sourcing new insurance • Explore and adopt cyber insurance across KMG and its 5. Awareness and timely communication: the risk management products; and subsidiaries; process draws upon objective, reliable and relevant • relocated Kazakhstan Energy Reinsurance Company Ltd. information; from the Islands of Bermuda to the Astana International 6. Efficiency: KMG Group makes smart use of the resources Financial Centre (AIFC), Nur-Sultan, to exclude a controlled required for risk management activities, ensuring cost foreign company from the Group’s taxable base for local tax efficiency of risk management; purposes. 7. Reasonable assurance: due to inherent internal and external constraints such as the human factor, appropriateness The Company with Compliance Service and other units ORGANISATIONAL STRUCTURE OF KMG’S CRMS of controls, etc., the CRMS can only provide reasonable established a working group, outlined the corruption Shareholders but not absolute assurance that the Company’s strategic risk assessment guidelines, arranged training sessions and operational goals will be achieved; and prepared the Register of Corruption Risks. KMG’s Board 8. Adaptability: the CRMS is continuously improved to ensure of Directors approved the Report on Assessment of Corruption Board of Directors Audit Committee the identification of all potential risks related to operations, Risks at KMG and the Action Plan to Minimise Corruption Risks as well as to maximise the effectiveness of risk control under the Action Plan for Ensuring Compliance with the Law and management; of the Republic of Kazakhstan On Anti-Corruption across Internal Audit 9. Rigorous process: all activities are performed in line Subsidiaries of Samruk-Kazyna JSC for 2019 approved Management Board Service with the procedures outlined in the internal regulations by an order of the Chairman of the Management Board of KMG and its subsidiaries; of the Fund. 10. Leadership commitment: the Company’s management Risk Committee Responsible unit Goal owners Risk owners Risk factor owners is actively involved in and provides support to, the implementation and improvement of the risk management system at KMG Group. KMG’s subsidiaries Risk Coordinator and associates

Employee of KMG/subsidiary

144 145 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Functional map of CRMS participants

Board of Directors Audit Committee of the Board of Directors Internal Audit Service (IAS) Goal owners (Company employees – heads Risk owners (Company employees in positions Risk factor owners (Company employees • Approves strategic, mid- and short- • Reviews all matters relating to internal • Assesses the performance of KMG or its subsidiaries) not lower than deputy heads reporting directly in positions not lower than functional unit/ term goals; and external (financial) audit, financial of the risk management process, notifies to the chief officer) business unit heads) • Ensures the availability of an effective reporting and risk management, the Board of Directors of significant • Have accountability for achieving • Manage risk factors which, if realised, • Manage risk factors which, if realised, CRMS, including by approving and prepares recommendations gaps in the CRMS and develops approved operational/non- may cause an operational/non- may cause an operational/non- the CRMS Policy; to the Board of Directors; recommendations to improve the risk operational targets; operational risk; operational risk; • Approves the Company’s risk appetite • Previews the Company’s risk appetite, management process; • Approve quantitative/qualitative risk • Duly manage and control risk factors • Duly manage and control risk factors along with tolerance levels for KMG’s Risk Register, risk map, Risk Management • Assesses the performance of preventive values that influence the achievement relating to the operation of processes relating to the operation of processes risks; Action Plan, KRI, quarterly risk reports measures on risks/risk factors of set KPIs (targets) and align the Risk overseen by risk factor owners; overseen by risk factor owners; • Approves the Risk Register, risk map, and CRMS Policy with subsequent (control procedures) and develops Management Action Plan; • Provide timely, complete information • Provide timely, complete information key risk indicator (KRI) and KMG’s Risk amendments prior to approval recommendations to eliminate identified • Oversee timely implementation on the status of risk factors on the status of risk factors;a nd Management Action Plan; by the Board of Directors. gaps (as necessary); of the approved Risk Management and implementation of mitigation the implementation of mitigation • Reviews and approves quarterly risk • Notifies KMG’s responsible unit of new Action Plan. measures to KMG’s responsible unit; measures to the responsible KMG unit; reports; risk factors identified during audits • Develop and implement a business • Develop and implement a business • Approves CRMS performance and absent from the Register. continuity plan; continuity plan; indicators and arranges for annual • Develop risk management mechanisms • Develop risk management mechanisms performance assessment of KMG’s for individual risk types, as well as control for individual risk types, as well as control CRMS; procedures relating to the operation procedures relating to the operation • Approves KMG’s business continuity of mitigation processes overseen of mitigation processes overseen plans. by risk factor owners at KMG (corporate by risk factor owners at KMG (corporate Management Board Risk Committee of the Management Board Risk Management Department standards, regulations and policies standards, regulations and policies on managing certain types of risks). on managing certain types of risks). • Implements the CRMS Policy, • Reviews risk management guidelines; • Develops and updates guidelines including oversight of compliance • Reviews new approaches on the CRMS, internal control Subsidiaries, including jointly controlled Risk Coordinator Employee of KMG/subsidiary with the CRMS Policy across KMG’s to risk management and their relevance system (ICS) and business continuity entities and joint ventures of KMG (KMG’s units; for the Company; management system (BCMS); subsidiaries) • Sets up the CRMS and ensures its • Reviews proposals on appointing risk • Provides advisory support effective operation; owners, risk factor owners, and risk to CRMS participants on the operation • Ensure timely set-up of the risk • A responsible employee of a business • Performs duties relating to risk • Approves the register of risk coordinators; of the CRMS, ICS and BCMS; identification and assessment unit designated by the risk/risk factor management as per the job description; owners, risk factor owners and risk • Reviews the Company’s risks • Conducts training on risk management, process in line with the CRMS owner; • Timely notification to the responsible coordinators; and mitigation measures; ICS and BCMS; guidelines; • Organises and coordinates risk/risk unit of KMG/KMG’s subsidiary • Reviews KMG’s quarterly risk reports • Approves the Company’s risk appetite, • Prepares the Risk Register, risk map, Risk • Duly manage and control risks factor management efforts within and their immediate supervisor of any and takes appropriate steps within risk tolerance levels, Risk Register, risk Management Action Plan and quarterly relating to the operation of business their business unit and interacts actual or potential errors/gaps that have its remit; map, Risk Management Action Plan, KRI risk reports; processes at subsidiaries; with the responsible unit. caused or may cause potential loss, • Improves internal documents and quarterly risk reports. • Monitors compliance with risk tolerance • Submit timely risk reports, along as well as of any actual or potential risk on risk management at KMG and its and KRI levels; with complete information events in the manner and time specified subsidiaries. • Develops risk and control matrices on the status of operational/ by internal regulations on the CRMS; and business process flowcharts non-operational risks, • Takes training in risk management in line (together with business process owners) ; as well as on the implementation with the approved training programme. • Coordinates the implementation of relevant mitigation measures of the ICS and BCMS at KMG and its and the occurrence of risk events subsidiaries; to the responsible KMG unit; • Oversees the implementation of risk • Develop and implement a business management measures and monitors continuity plan for subsidiaries. the status of risks; • Cooperates with the IAS, business units, external advisers and other stakeholders on risk management, the ICS and BCMS within its remit.

146 147 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

ROLE OF THE BOARD OF DIRECTORS WITHIN THE CRMS The ICS is a key element of KMG’s corporate governance KEY RISKS The following documents are submitted for review to KMG’s system and is defined as the totality of processes, procedures, Board of Directors at least once a year: behaviours and activities that support efficient and effective • Proposals on the Company’s risk appetite; operations, drive progress towards KMG’s operational goals Risk description and likely impacts Mitigation and management • Consolidated Risk Register; and minimise process-level risks. Production decline risk • Risk map; To maintain production rates at mature fields, KMG: • The Company’s Risk Management Action Plan. KMG’s Internal Control System Policy outlines the objectives, • implements measures to increase time between well repairs; Declines in production from mature fields operating principles and elements of the ICS. In order • ensures timely execution of well services, workovers and well interventions; is KMG’s key operational risk. In addition, a risk report (consolidated based on the coverage to implement the Internal Control System Policy, the Company • implements upgrade programmes for obsolete equipment; of KMG’s subsidiaries and associates) is submitted has put in place the Internal Control System Guidelines • deploys new technologies to maintain production rates at mature fields. on a quarterly basis to the Board of Directors for consideration detailing related roles, responsibilities, operating procedures, Work-related injury risk with the Board duly reviewing and discussing it in full. organisation and performance criteria. To prevent industrial accidents, KMG implements organisational and technical The Board of Directors takes appropriate measures to bring measures that ensure: the existing risk management and internal control system in line KMG and its subsidiaries annually approve Timetables Employee non-compliance with the established • safe work execution and prevention of work-related injuries and occupational with the principles and approaches determined by the Board for developing respective business process flow charts and risk health and safety rules, and breaches diseases; of operational discipline may pose a threat • timely training and knowledge testing; of Directors. and control matrices, as well as test (review) the design to the life and health of employees. • internal health and safety controls; of controls and prepare improvement recommendations. • deployment of new technologies and mechanised techniques, and improvement The results of these ICS activities are communicated to business of industrial safety for production facilities. process owners, the IAS, Management Board and Board INTERNAL CONTROL SYSTEM (ICS) Risk of emergencies or man-made disasters at production facilities The ICS is an integral part of the CRMS. The system uses of Directors. the COSO framework and includes five interrelated elements. To mitigate operational risks, the Company: • ensures timely maintenance and repair of equipment as required by relevant regulations; CORPORATE INSURANCE • performs timely retrofits and upgrades; INTERNAL CONTROL SYSTEM (ICS) • performs timely diagnostics and identification of potential hazards, as well as industrial safety assessments of production facilities; Insurance is central to ensuring robust risk control and financial The Company’s operations • improves the technical expertise and qualifications of operating personnel. management across the Group as it serves to protect are potentially hazardous. KMG is exposed The Company is phasing in advanced protection, safety and security technology to the risk of damage to property, third parties the property interests of the Company and its shareholders and solutions. or the environment caused by accidents against unexpected losses that may result from operations, In accordance with statutory HSE requirements, KMG takes out annual Control environment or emergencies, man-made disasters mandatory liability insurance for facility owners whose operations have including as a result of external factors. at production facilities or third party an inherent risk of damage to third parties, as well as mandatory environmental misconduct. insurance. In addition, annual voluntary property insurance is taken out (against The Group’s insurance function is centralised to ensure the risk of accidental destruction, loss or damage) for insured events (reference Monitoring the enforcement of the group-wide Corporate Standard to the insurance information in this Annual Report). procedures Risk assessment for obtaining and maintaining insurance cover in implementing 119 a comprehensive approach to managing continuous coverage. For more details see the Liability insurance section COSO KMG’s Corporate Insurance Programme includes the following Environmental risk and climate change risk key types of insurance coverage: The Company’s priorities in environmental protection: • Insurance of core operating assets of the Company; • Greenhouse gas management and flaring reduction; • Water management; Information Controls • Public liability insurance; • Energy risk insurance. • Production waste management; and communications • Land reclamation; The Company is exposed to the risk • Energy efficiency improvement. When taking out insurance policies for its core production of adverse environmental impact and the risk To mitigate the environmental risk, the Company: assets, KMG covers the risks of damage to (loss of) property of tougher responsibility for non-compliance • ensures preventive management of significant environmental aspects, based due to emergencies and other incidents and maintains business with environmental laws, as well as risks related on project management and a risk-based approach, to improve environmental to climate change. performance; liability insurance. • engages stakeholders on environmental issues; KMG and its subsidiaries implement the ICS to achieve • comprehensively develops the corporate environmental function and aligns reasonable assurance that KMG will reach its goals across three A reinsurance company is only considered for reinsurance when KMG’s activities with green economy principles. key areas: holding a financial credit rating of at least “A–” on the Standard The Company takes an active role in the working group of the authorised body • Improving operational efficiency; and Poor’s scale. tasked with developing new environmental laws. • Preparing complete and reliable financial statements; • Complying with Kazakhstan’s laws and KMG’s internal The Group applies industry best practice in negotiating the best documents. insurance and risk coverage terms.

148 149 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Risk description and likely impacts Mitigation and management Risk description and likely impacts Mitigation and management Risk of gas shortages Oil price fluctuations Gas export volumes might decrease due KMG continuously monitors and analyses price and demand dynamics for crude to (1) higher domestic gas consumption, given oil and oil products. The Company’s strategic and current planning model is based the introduction of gas chemical projects The company has envisaged the implementation of a number of projects to increase on a scenario approach and can be adjusted as necessary. The Company is exposed to the risk of energy in the domestic market, (2) a decrease in gas the resource base of marketable gas by expanding the capacity for processing The Company has internal reserves and is capable of optimising its costs and capital price volatility. production due to gas re-injection, aimed associated petroleum gas, reducing gas re-injection and burning associated investments to meet its obligations if prices of oil, gas or oil products fall. It also at maintaining oil production plateau and/or petroleum gas in the fields. Planned and ongoing work on the development of new keeps open the option of purchasing financial instruments to hedge against driven by the lack of gas processing capacities, perspective fields, as well as an increase in gas production at existing fields. a significant drop in oil prices. and also (3) due to insufficient development of the resource base gas production. Country risks and the risk of sanctions Geological risk The Company mitigates country risks by setting country-specific limits based on the analysis of the recipient country (from the economic, political, strategic, • Collection, analysis, synthesis and update of the geological and geophysical data social and other perspectives). The Company operates internationally. Any base; The Company analysed the impact on its operations from economic sanctions, along significant adverse change in the economic • Planning of geophysical surveys and exploration for hydrocarbons, application with potential response measures. Joint projects/material transactions with Russian and political situation in a recipient country The implementation of new exploration projects of effective study techniques and data processing and interpretation methods; entities were reviewed, with relevant potential operational and financial risks could affect the Company’s operations. is always associated with geological risks • High-resolution 2D/3D seismic surveys; explored. Sanctions against certain countries, including arising from the uncertainty of geology: lack • Building sedimentary, geology and basin models of the region and fields based The Company monitors existing sanctions to minimise negative impacts sectoral sanctions, can affect the Company’s of hydrocarbon discoveries, failure to confirm on qualitative analyses and advanced methods of geochemical and lithology and implications considering the potential widening of sanctions, which may operations and its prospective projects. recoverable oil (gas) reserve estimates. analyses; have a targeted impact on the Company’s prospective projects. To reduce risks, • Attracting strategic partners for joint exploration and development of new the Company provides for mechanisms to exit projects or implement them fields including carry financing arrangements to reduce the financial impact independently in the event of a tougher sanctions regime. of geological risks. Cyber risks Social unrest in operating regions The Company rolls out specialist information security hardware and software Growing global cybercrime and increased To mitigate social risks, the Company: solutions to ensure automated monitoring of external and internal threats. impact of digitalisation on production • runs awareness raising activities across operations including management The Company runs tests to check its ICT system for vulnerability to external attacks, and management processes at KMG lead holding reporting meetings directly with representatives of the workforce analyses its IT infrastructure security, audits network elements and monitors its to increased risks of attacks on the Company’s and trade unions; operating systems security on a regular basis. ITC system aimed at compromising its integrity, The Company is exposed to the risk • the Company builds an integrated youth policy system to drive engagement The Company’s information security management system is maintained to meet accessibility and security. of unauthorised strikes. among young employees and encourage them to participate in social activities the current international standards. and be part of the corporate team; • runs regular surveys, analyses and monitoring of employee satisfaction Reputational risks and social stability in its operating regions, with corresponding Action Plans The Company implements a range of measures to manage this risk including developed based on their findings. The Company is exposed to reputational publications in the media, holding of briefings, press conferences and management Liquidity and financial stability risks risk which affects its business reputation presentations highlighting various aspects of the Company’s activities and raising and relationships with investors, counterparties, awareness among stakeholders. To overcome these risks, along with debt management activities and efforts partners and other stakeholders. The Company maintains a speak-up hotline and a procedure ensuring prompt to prevent liquidity shortages, the Company is focused on improving operational responses to complaints and claims to eliminate their root causes. Liquidity and financial stability risks are key efficiency, clear prioritisation of capital expenditures, commitment to financial risks. discipline, rationalisation of the Company’s asset and project portfolios, FX risk and transition to portfolio-based project management. Given the currency mix of its revenues and liabilities, the Company is also exposed Compliance risk Currency risk is a potential negative change to FX risk in its operations. The strategy for managing this risk involves the use in the Company’s financial performance due of a holistic approach that considers natural (economic) hedging options. The Company consistently implements and reinforces internal controls, embedding to exchange rate fluctuations. KMG ensures the optimal balance of assets and liabilities denominated in foreign group-wide policies to prevent unlawful or wrongful acts by third parties or by its currency, and calculates earnings considering the FX risk. employees and maintaining the procedure for conducting internal investigations of unlawful or wrongful acts of its employees. The Company also maintains Tax risk a speak-up hotline. The Company has zero tolerance towards The Company has adopted policies and standards, as well as committed itself to: intentional corruption for personal or material The Company continuously monitors changes in tax laws, evaluates and forecasts • implementing and consolidating its internal and compliance controls; gain, including for the benefit of third parties, The Company is exposed to the persistent the extent to which they can potentially impact its operations, as well as following • conducting anti-corruption monitoring; or any other fraudulent or corrupt practices risks of changes in tax laws and lack of clear trends in law enforcement practice and considers the implications of regulatory • analysing corruption risks ; regardless of the amount of monetary damage. interpretation, as well as the risk of increased changes for its operations. The Company’s specialists regularly take part in various • promoting an anti-corruption culture; tax burden and loss of entitlement to tax working groups responsible for drafting tax legislation. • establishing an organisational and legal framework to foster accountability, benefits. To mitigate tax risks, the Company improves its tax administration processes controllability and transparency of decision-making procedures; and conducts tax audits. • implementing and complying with business ethics standards; • preventing conflicts of interest.

150 151 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Risk description and likely impacts Mitigation and management Risk description and likely impacts Mitigation and management Interest rate and commercial bank liquidity risk COVID-19 Pandemic Risk To mitigate these risks, the Company diversifies investments in financial The outbreak of coronavirus COVID-19 had instruments in accordance with the treasury portfolio’s pre-defined limits a negative impact on trade and the economy and regularly monitors how idle cash is placed across KMG Group. globally. The long-lasting impact from negative Most of KMG’s earnings are generated in US dollars, while the main source risk factors associated with the threat of borrowing is the international lending market. For these reasons, KMG’s debt of the COVID-19 pandemic might lead Higher interest rates and lower financial stability portfolio is largely denominated in US dollars. The interest rates for servicing to implication on the Company's performance: of the banking sector can have a negative a portion of these loans are based on LIBOR and EURIBOR interbank lending • significant decline in energy prices; impact on the cost of borrowing, as well rates. An increase in these interest rates may result in higher costs of servicing • threats to the health; as the placement of idle cash. the Company’s debt while an increase in the cost of loans for the Company may have • of workers and members of their families, a negative impact on its solvency and liquidity. the need to introduce a quarantine regime KMG has implemented measures to significantly reduce the Company’s debt in organizations and limitations of activities The Company constantly monitors changes in the situation with the spread and improve operational efficiency to move the Company into the green zone due to quarantine measures; of COVID-19 in the world and also carries out all the necessary preventive measures, of credit risk. • restriction of imports of goods, works, aimed at curbing the spread of COVID-19 at workplaces. The Company ensures services from China rstrictions preparedness for the potential deterioration of the epidemiological situation Investment (project) risk on the movement of labor, in connection as well as the implementation of a number of measures in order to ensure business with measures taken by the Government The Company is implementing a number continuity in case of detection of COVID-19. of China, aimed at curbing COVID-19 of projects in hydrocarbon exploration, The Company regularly monitors the status of project implementation in the regions spread (including the ban on the departure production, transportation and processing, in which it operates, making timely adjustments to project implementation plans of citizens from China); which could be exposed to significant as necessary. Where risk can arise affecting the timing, budget or quality of projects, • restrictions on air / aiway communication risks associated with external and internal mitigation measures may include negotiations with stakeholders, reduction with China, which might lead to a delay factors. The materialisation of such risks can of operating costs, optimisation of the investment programme, etc. in the implementation of investment significantly affect the success of these projects. projects with Chinese goods / wok servce, the involvement of foreign labor from China; Risks of changes in applicable laws, and litigation and arbitration risks • decrease in gas exports to China due The Company continuously monitors changes in laws as well as evaluating to a significant decrease in gas demand The Company’s performance can be impacted and forecasting the extent to which they can potentially impact the operations from China. by changes in applicable laws including subsoil of Group entities. The Company regularly takes part in working groups to develop use, tax, currency, customs regulations, etc., and discuss draft laws in various areas of the law. as well as the risk of negative court decisions The Company continuously monitors laws as well as judicial and law enforcement on court or arbitration disputes involving practices and actively applies them in resolving legal issues and disputes arising the Company. in the course of the Company’s operations.

152 153 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

SHAREHOLDER AND INVESTOR DIVIDENDS

Principles of KMG’s Dividend Policy: Dividend history • Guaranteed payment of dividends on the state-owned stake; Indicator 2017 2018 RELATIONS 1 • Ensuring financial support for the Fund’s activities, including Dividend per share, KZT 61.54 60.64 new activities and investment projects financed by the Fund; • The Group companies finance their own growth Total dividends paid, KZT bln 36.2 36.9 KMG Shareholders1 programmes, including investment activities. Total dividends / net profit under IFRS, % 8.29% 5.32% (according to the Dividend Policy)

Shareholder Ordinary shares Ordinary shares, Preferred Total shares Total shares, % % shares

JSC Sovereign Wealth Fund Samruk-Kazyna 551,698,745 90.42 – 551,698,745 90.42 The National Bank of Kazakhstan 58,420,748 9.58 – 58,420,748 9.58 CREDIT RATINGS

Credit Ratings Rating Outlook 1 Securities issues S&P BB Negative Moody’s Baa3 Positive Type of shares Authorised shares Outstanding shares Unissued shares Fitch BBB– Stable Ordinary 849,559,596 610,119,493 239,440,103 As at 27 March 2020

Significant improvements in KMG’s financial performance upgraded KMG’s stand-alone credit profile (excluding any 1. KMG 2019 annual financial statements (consolidated prompted upgrades of KMG’s credit ratings on a stand-alone extraordinary government support) to “BB–”. This upgrade There were no changes in the shareholder structure and separate) basis by the three leading global rating agencies in 2018-2019. reflects (1) KMG’s substantial upstream operations; (2) in the reporting period. 2. KMG’s 2019 net profit distribution • On 8 November 2018, S&P Global Ratings upgraded KMG’s integration with more stable midstream and downstream 3. Amount of dividend per KMG share long-term ratings from “BB–” to “BB”. Outlook: Stable. segments; and (3) KMG’s status as a national oil and gas The annual General Meeting of Shareholders, with its roles The upgrade reflects the agency’s expectation of continued company. performed by the Management Board of Samruk-Kazyna JSC The General Meeting of Shareholders also will review the matter improvement in KMG’s stand-alone credit profile metrics. • On 27 March 2020, S&P Global Ratings affirmed its "BB" according to applicable law and the KMG Charter, pending concerning shareholder queries regarding the Company’s S&P upgraded KMG’s stand-alone credit profile (SACP) rating and revised its outlook on KMG to "negative" approval of the following documents: and its officers’ actions and corresponding responses. from “B” to “B+”. on the back of lower oil prices. • On 22 August 2019, Moody’s upgraded KMG’s outlook • On 27 March 2020, Fitch affirmed KMG's ratings at "BBB-", No extraordinary General Meetings of Shareholders were held from “stable” to “positive” and affirmed its “Baa3” Outlook: Stable. during the year. rating. KMG’s baseline credit assessment (excluding any extraordinary government support) was upgraded from “Ba3” to “Ba2”. The upgrade reflects the improvement in KMG’s credit metrics, including reduced leverage and increased interest coverage. • On 28 March 2019, Fitch affirmed KMG’s long-term issuer default rating at “BBB–”. Outlook: Stable. The agency

1. 1. As at 31 December 2019. Sovereign Wealth Fund Samruk-Kazyna Joint-Stock Company (hereinafter - Samruk-Kazyna, the Fund).

154 155 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

BOND ISSUES INVESTOR COMMUNICATIONS

As at 31 December 2019, KMG’s consolidated debt (expressed and retail investors, mostly based in the USA, Europe, and Asia. KMG continues to successfully implement its investor Direct communication through regular meetings in USD) was USD 10.0 bln, including USD 7.3 bln (around 73%) KMG’s Eurobonds are traded on the London Stock Exchange relations programme targeting current and potential investors and conference calls enables the investment community, in bond issues. and the Kazakhstan Stock Exchange. and the investment community at large. including investors, analysts, representatives of financial news publications and international rating agencies, to get insights KMG borrows both on the national and global capital markets As at 31 December 2019, KMG had seven outstanding Eurobond Communications with investors are handled at the highest into the Company’s strategic development, as well as its in line with its flexible, balanced debt management policy. KMG issues for a total amount of USD 6.41 bln on par value. In 2019, level, including Chairman of the Board of Directors, Chairman financial and operating results directly from management. bonds are among the most liquid instruments among those KMG’s Eurobonds’ yields decreased due to lower global interest of the Management Board, members of the Management Board, offered by Kazakhstan’s issuers. KMG’s FX-denominated bonds rates, low country risk (average of CDS on Kazakhstan in 2019: and heads of KMG’s strategic, financial, and operating units, Investor materials are published by the Company and made have been historically attractive to a wide range of investors. 70 ), and KMG’s improved credit profile. as well as the Investor Relations and Regulatory Disclosure publicly available. KMG publishes on a quarterly basis KMG bonds’ investor base includes thousands of institutional Department. the Management’s Discussion and Analysis of Financial Condition and Results of Operations, along with a quarterly Throughout 2019, KMG maintained a regular direct results presentation and press release, as well as IFRS financial communication channel between management and investors statements. Analyst databooks are also made available KMG’s outstanding Eurobonds1 through roadshows, group and one-on-one meetings, to enable detailed analyses of the Company’s operations. conferences and other events organised by global institutions Currency Issue size, USD bln Outstanding Coupon rate, % Issue date Maturity date ISIN: REGS/ 144A and investment banks in Kazakhstan and internationally. In May The Board of Directors and Management Board use comments amount, USD bln p.a. and October 2019, top managers held a series of successful and feedback from investors to inform decisions on further USD 1.00 0.41 4.4 30 April 2013 30 April 2023 XS0925015074/ roadshow meetings with a number of key European and US enhancement of this critical two-way dialogue, including US46639UAA34 investment funds and institutions – bondholders and potential an initiative by the Board of Directors to commission USD 0.50 0.50 3.875 19 April 2017 19 April 2022 XS1595713279/ investors. Investors emphasised the importance of face- an independent investor perception survey on the Company. US48667QAM78 to-face meetings with the Company management through roadshows, and strongly welcomed the initiative to hold regular KMG intends to continue developing its IR function to boost USD 1.00 1.00 4.75 19 April 2017 19 April 2027 XS1595713782/ US48667QAN51 meetings. KMG targets to continue regular investor engagement the Company’s investment appeal and reduce the cost of new by holding roadshows, one-on-one or group meetings debt. USD 1.25 1.25 5.75 19 April 2017 19 April 2047 XS1595714087/ US48667QAP00 and participating in investor conferences.

USD 0.50 0.50 4.75 24 April 2018 24 April 2025 XS1807299174/ US48667QAR65 KMG holds quarterly conference calls for investors with the Deputy Chairman and members of the Management USD 1.25 1.25 5.375 24 April 2018 24 April 2030 XS1807300105/ Board, as well as department directors. US48667QAQ82 USD 1.50 1.50 6.375 24 April 2018 24 October 2048 XS1807299331/ US48667QAS49 Total 7.00 6.41 2019 investor calendar Source: Bloomberg. Q1 2019 • Investor conference call on full-year 2018 financial and operating results • Management’s discussion and analysis of the financial condition and results of operation, and quarterly results presentation KMG’S EUROBONDS MID-YIELDS Q2 2019 • Investor conference call on first-quarter results % • Management’s discussion and analysis of the financial condition and results of operations, and quarterly results 10.0 presentation. • 2018 Annual Report publication 9.0 Low oil prices led to higher yields on KMG bonds • Investor roadshow in May (London, Frankfurt, New York, Boston, Chicago, Los Angeles) 8.0 Q3 2019 • Investor conference call on second-quarter results • Management’s discussion and analysis of the financial condition and results of operations, and quarterly results 7.0 presentation. 6.0 • 2018 Sustainability Report publication

5.0 Q4 2019 • Investor conference call on third-quarter results • Management’s discussion and analysis of the financial condition and results of operations, and quarterly results 4.0 presentation. • Participation in the "Kazakhstan in Focus Day" investor event held in London, UK, and in The Emerging & Frontier 3.0 Markets Conference in New York, USA 2.50 2.25 • Investor roadshow in October (London, Frankfurt, Zurich, New York, Boston, Los Angeles) 2.0 2.00 1.75 1.25 1.0 The US Federal Reserve cut interest rates five times in 2019 - . March 2020, aimed at supporting the US economy . The fed funds 0.25 0.0 rate is at 0% -0.25 % as of 15 March

Jan 19 Mar 19 May 19 Jul 19 Sep 19 Nov 19 Jan 20 Mar 20

156 157 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements #1 BY BY OIL REFINING IN KAZAKHSTAN

The Company occupies 81% of KAZAKHSTAN’S DOMESTIC the Republic of Kazakhstan's oil CONSUMERS refining market WERE FULLY SELF- SUFFICIENT IN FUELS AND LUBRICANTS (K4, K5). 37 THOUSAND TONNES OF PETROL WERE EXPORTED

Following the completion of the extensive upgrade of Kazakhstan’s leading refineries – NEXT: Atyrau, Pavlodar, and Shymkent FINANCIAL refineries – the throughput capacity and refining depths were STATEMENTS increased, oil product quality was elevated to meet the K-4 and K-5 (equivalent to Euro-4 and Euro-5) standards

158 159 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

AUDITOR'S REPORT

160 161 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

162 163 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

164 165 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CONSOLIDATED FINANCIAL For the years ended December 31 In millions of tenge Note 2019 2018 2017 (Reclassed)1 (Reclassed)1 STATEMENTS Net profit/(loss) for the year attributable to: Equity holders of the Parent Company 1,197,157 695,864 443,408 for the year ended December 31, 2019 with independent 1,158,457 693,511 525,448 Net profit/(loss) for the year attributable to auditors’ report Equity holders of the Parent Company 1,197,157 695,864 443,408 Non-controlling interest (38,700) (2,353) 82,040

1,158,457 693,511 525,448 Other comprehensive income Other comprehensive income/(loss) to be reclassified CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME to profit or loss in subsequent periods Exchange differences on translation of foreign operations (32,072) 479,196 (75,011)

Tax effect (1,240) − − For the years ended December 31 Reclassified differences on translation of disposal group − (476) (424) In millions of tenge Note 2019 2018 2017 (Reclassed)1 (Reclassed)1 Net other comprehensive (loss)/income to be reclassified (33,312) 478,720 (75,435) to profit or loss in the subsequent periods Revenue and other income Other comprehensive loss not to be reclassified to profit Revenue 6 6,858,856 6,988,964 4,793,763 or loss in subsequent periods

Share in profit of joint ventures and associates, net 7 827,979 697,326 414,950 Actuarial loss on defined benefit plans of the Group (5,688) (3,658) (1,148)

Finance income 14 240,880 161,027 122,574 Actuarial loss on defined benefit plans of joint ventures 199 (160) (173) Gain on sale of subsidiaries 5 17,481 18,359 − Other − − (150) Other operating income 24,936 23,035 20,165 Tax effect 1,179 (86) 8 Total revenue and other income 7,970,132 7,888,711 5,351,452 Net other comprehensive loss not to be reclassified (4,310) (3,904) (1,463) to profit or loss in the subsequent periods Costs and expenses Net other comprehensive (loss)/income for the year (37,622) 474,816 (76,898) Cost of purchased oil, gas, petroleum products and other 8 (3,913,744) (4,312,958) (2,729,514) materials Total comprehensive income for the year, net of tax 1,120,835 1,168,327 448,550 Production expenses 9 (721,693) (604,475) (624,346) Total comprehensive income for the year attributable to:

Taxes other than income tax 10 (454,295) (477,732) (354,447) Equity holders of the Parent Company 1,159,447 1,161,007 366,949

Depreciation, depletion and amortization 35 (337,424) (285,186) (238,021) Non-controlling interest (38,612) 7,320 81,601

Transportation and selling expenses 11 (420,402) (370,777) (238,063) 1,120,835 1,168,327 448,550

General and administrative expenses 12 (213,967) (213,485) (163,780)

Impairment of property, plant and equipment, intangible 13 (207,819) (165,522) (24,660) Deputy Chairman of the Management Board – Chief Financial Officer assets, exploration and evaluation assets

Reversal of impairment of investment in joint venture 19 − − 14,845 Managing director − financial controller Other expenses (7,203) (23,283) (34,767)

Finance costs 14 (317,433) (427,655) (306,355) Chief accountant

Net foreign exchange gain/(loss) 8,479 (38,320) 67,055 Total costs and expenses (6,585,501) (6,919,393) (4,632,053)

Profit before income tax 1,384,631 969,318 719,399 Income tax expenses 30 (226,180) (279,260) (190,285)

Profit for the year from continuing operations 1,158,451 690,058 529,114 Discontinued operations Profit/(loss) after income tax for the year from discontinued 5 6 3,453 (3,666) operations 1. Certain numbers shown here do not correspond to the consolidated financial statements for the years ended December 31, 2018 and 2017, and reflect Net profit for the year 1,158,457 693,511 525,448 reclassifications made, refer to Note 3

166 167 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at December 31 As at December 31

In millions of tenge Note 2019 2018 2017 In millions of tenge Note 2019 2018 2017 (Reclassed)1 (Reclassed)1 (Reclassed)1 (Reclassed)1

Assets Non-current liabilities Non-current assets Borrowings 25 3,584,076 3,822,648 3,417,112 Property, plant and equipment 15 4,484,271 4,515,170 4,080,165 Provisions 26 273,589 229,797 203,775 Right-of-use assets 38,379 − − Deferred income tax liabilities 30 509,462 479,598 380,738 Exploration and evaluation assets 16 179,897 189,800 253,326 Lease liabilities 35,996 6,550 5,314 Investment property 9,541 24,188 27,423 Prepayment on oil supply agreements 27 — 480,250 581,578 Intangible assets 17 171,172 173,077 185,205 Other non-current liabilities 43,694 45,213 51,879 Long-term bank deposits 18 52,526 52,297 48,523 4,446,817 5,064,056 4,640,396 Investments in joint ventures and associates 19 5,590,384 4,895,444 3,823,630 Current liabilities Deferred income tax asset 30 73,714 97,881 98,681 Borrowings 25 253,428 330,590 884,140 VAT receivable 133,557 113,073 96,666 Provisions 26 103,538 98,471 78,812 Advances for non-current assets 73,367 27,176 124,907 Income tax payable 30 13,011 13,272 10,081 Loans and receivables due from related parties 22 615,546 638,528 672,449 Trade accounts payable 28 667,861 632,739 513,851 Other financial assets 2,488 4,753 4,161 Other taxes payable 29 86,666 105,026 101,198 Other non-current assets 17,162 16,942 17,401 Lease liabilities 10,922 2,656 1,676 11,442,004 10,748,329 9,432,537 Prepayment on oil supply agreements 27 — 384,199 332,330 Current assets Other current liabilities 28 303,016 236,163 201,940 Inventories 20 281,215 312,299 250,369 1,438,442 1,803,116 2,124,028 VAT receivable 74,049 66,522 69,605 Liabilities directly associated with the assets classified 5 — 5,039 1,929 as held for sale Income tax prepaid 30 54,517 53,143 36,135 Total liabilities 5,885,259 6,872,211 6,766,353 Trade accounts receivable 21 397,757 493,977 467,867 Total equity and liabilities 14,081,915 14,015,280 13,549,958 Short-term bank deposits 18 359,504 386,459 1,638,941 Book value per ordinary share 24 13.154 11.424 11.195 Loans and receivables due from related parties 22 138,719 148,615 169,502 Other current assets 21 262,094 204,723 196,110 Cash and cash equivalents 23 1,064,452 1,539,453 1,263,987 2,632,307 3,205,191 4,092,516 Deputy Chairman of the Management Board – Chief Financial Officer Assets classified as held for sale 5 7,604 61,760 24,905 2,639,911 3,266,951 4,117,421 Managing director − financial controller Total assets 14,081,915 14,015,280 13,549,958 Chief accountant Equity and liabilities Equity Share capital 24 916,541 916,541 709,345 Additional paid-in capital 24 40,794 40,794 243,876 Other equity 83 83 83 Currency translation reserve 1,731,747 1,764,108 1,295,091 Retained earnings 5,469,236 4,341,063 3,665,192 Attributable to equity holders of the Parent Company 8,158,401 7,062,589 5,913,587 Non-controlling interest 24 38,255 80,480 870,018 Total equity 8,196,656 7,143,069 6,783,605

1. Certain numbers shown here do not correspond to the consolidated financial statements for the years ended December 31, 2018 and 2017, and reflect reclassifications made, refer to Note 3

168 169 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CONSOLIDATED STATEMENT OF CASH FLOWS

For the years ended December 31 For the years ended December 31

In millions of tenge Note 2019 2018 2017 In millions of tenge Note 2019 2018 2017 (Reclassed)1 (Reclassed)1 (Reclassed) 1 (Reclassed)1

Cash flows from operating activities Cash generated from operations 280,073 769,500 647,994

Profit before income tax from continuing operations 1,384,631 969,318 719,399 Dividends received from joint ventures and associates 126,461 160,061 271,783

Profit/(loss) before income tax from discontinued operations 6 3,453 (3,666) Net (payment)/ receipt of derivative instruments (7) (225) 57

Profit before income tax 1,384,637 9 7 2 , 7 7 1 7 1 5 , 7 3 3 Income taxes paid (161,979) (186,199) (112,605) Adjustments: Interest received 118,207 134,365 104,804

Depreciation, depletion and amortization 35 337,424 285,186 238,021 Interest paid (238,954) (248,341) (216,640)

Impairment of property, plant and equipment, intangible assets, exploration 13 207,819 165,522 24,660 Net cash flow from operating activities 123,801 629,161 695,393 and evaluation assets Cash flows from investing activities Reversal of impairment of investment in joint venture 19 – – (14,845) Withdrawal/(placement) of bank deposits, net 28,987 1,295,272 (457,273) Impairment of assets classified as held for sale 24 168 68 Purchase of property, plant and equipment, intangible assets, investment (444,193) (430,305) (464,353) (Reversal of) /allowance for impairment of long term advances 12 (11) – 1,188 property and exploration and evaluation assets (Reversal of) /allowance for obsolete inventories (2,534) 4,339 345 Proceeds from sale of property, plant and equipment, intangible assets, 42,776 8,711 1,408 investment property and exploration and evaluation assets Accrual/(reversal) of expected credit losses for trade receivables 12 1,892 (1,489) 1,056 Proceeds from disposal of subsidiaries (Note 5) 56,760 18,112 9,151 Accrual/(reversal) of expected credit losses other current assets 12 12,246 1,225 (120) Cash acquired with subsidiaries – – 181 VAT written-off 12 6,910 3,031 7,923 Acquisition of and contribution to joint ventures (889) (1,467) (3) Accrual/(reversal) of impairment of VAT receivable 12 15,703 4,215 (24,158) Proceeds from disposal of joint ventures (Note 19) – 2,000 – Adjustment on the re-measurement to fair value less costs to sell – 2,291 711 Refund of contribution to joint ventures – 93,072 1,715 Net foreign exchange differences 4,142 ( 6 , 0 6 1 ) (62,879) Loans given to related parties (56,516) (64,716) (184,708) Loss on disposal of property, plant and equipment, intangible assets 6,430 3 , 5 1 7 3,815 and investment property, net Repayment of loans due from related parties (Note 31) 47,656 40,984 455

Unrealized (gains)/ losses from derivatives on petroleum products (465) (415) 231 Refund/(acquisition) of debt securities 454 244 (332)

Realized (gains)/ losses from derivatives on petroleum products (8,410) 1,435 3,534 Proceeds from Note receivable from a shareholder of a joint venture (Note 31) 5,403 29,174 –

Adjustment for repayment of advances received for the supply of oil (Note 27) (864,450) (344,274) (244,559) Net cash flows (used in)/ from investing activities (319,562) 991,081 (1,093,759)

Finance costs 14 317,433 427,655 306,355 Cash flows from financing activities

Finance costs from discontinued operations – 85 131 Proceeds from borrowings (Note 25) 271,772 1,249,907 1,508,170

Finance income 14 (240,880) (161,027) (122,574) Repayment of borrowings (Note 25) (444,656) (2,069,977) (689,074)

Finance income from discontinued operations – (66) (427) Dividends paid to Samruk-Kazyna and National Bank of RK (Note 24) (36,998) (36,273) (45,878) Gains on sale of subsidiaries 5 (17,481) (18,359) − Dividends paid to non-controlling interests (Note 24) (5,693) (6,390) (12,416)

Share in profit of joint ventures and associates, net 30 (827,979) (697,326) (414,950) Share buyback by subsidiary (Note 24) (2,318) (642,524) –

Change in financial guarantees ( 6 , 9 5 6 ) 1,405 1,381 Distribution to Samruk-Kazyna (36,297) (13,553) (22,652)

Movements in provisions 26 2,967 6,711 (9,896) Payment of principal lease liabilities (16,181) (1,558) (1,069)

Operating profit before working capital changes 328,461 650,539 410,744 Net cash flows (used in)/from financing activities (270,371) (1,520,368) 737,081

Change in VAT receivable (28,070) (12,250) (9,466) Effects of exchange rate changes (14,985) 179,467 22,437

Change in inventory 11,710 (55,606) (53,833) Change in allowance for expected credit losses (279) (98) –

Change in trade accounts receivable and other current assets 11,466 26,369 (17,795) Net change in cash and cash equivalents (481,396) 279,243 361,152

Change in trade and other payables and contract liabilities (23,578) (39,896) 61,908 Net change in cash and cash equivalents (481,396) 279,243 361,152 Change in advances received for oil supply (Note 27) – 172,322 175,133 Cash and cash equivalents, at the beginning of the year 1,545,848 1,266,605 905,453

Change in other taxes payable (19,916) 28,022 81,303 Cash and cash equivalents, at the end of the year 1,064,452 1,545,848 1,266,605

1. Certain numbers shown here do not correspond to the consolidated financial statements for the years ended December 31, 2018 and 2017, and reflect reclassifications made, refer to Note 3

170 171 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

NON-CASH AND OTHER TRANSACTIONS: SUPPLEMENTAL DISCLOSURE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY The following significant non-cash transactions and other transactions were excluded from the consolidated statement of cash flows: Attributable to equity holder of the Parent Company

Account payable for non-current assets In millions of tenge Share Additional Other Currency Retained Total Non- Total capital paid-in capital equity translation earnings controlling For the year ended December 31, 2019 accounts payable for purchases of property, plant and equipment increased by 97,382 million reserve interest tenge (2018: 41,609 million tenge, 2017: 11,795 million tenge). As at December 31, 2016 696,377 243,655 222 1,370,264 3,322,319 5,632,837 801,560 6,434,397 Net profit for the year – – – – 443,408 443,408 82,040 525,448 Additions to Property, Plant and Equipment (PPE) Other comprehensive loss – – – (75,173) (1,286) (76,459) (439) (76,898)

In 2018 and 2017 the Group received PPE on deferred payment terms in the amount of 33,216 million tenge and 135,393 million Total comprehensive – – – (75,173) 442,122 366,949 81,601 448,550 tenge, respectively, which were directly capitalized within additions to PPE (Note 25). income for the year Contribution to share 12,968 221 – – – 13,189 – 13,189 Contribution of pipelines capital Dividends (Note 24) – – – – (45,879) (45,879) (13,269) (59,148) In 2018 the Company issued common shares for the total amount of 207,196 million tenge in exchange for gas pipelines received Distributions to Samruk- – – – – (23,634) (23,634) – (23,634) from Samruk-Kazyna and earlier recognized as additional paid in capital (Note 24). Kazyna (Note 24) Transactions — — — — (29,736) (29,736) — (29,736) Derecognition of borrowings from subsoil use contracts’ project partners with Samruk-Kazyna

In 2019 one and in 2018 two subsoil use contracts were terminated voluntarily by the Group and its projects partners. These projects (Note 24) – – – – (29,736) (29,736) – (29,736) were funded on carry-financing basis, according to which the share of expenses of the Group was financed by the project partners. Execution of share-based – – (131) – – (131) 131 – These amounts were recognized as borrowings and were payable upon start of the commercial production and in case of positive payments cash flows. As the projects were ceased, the Group derecognized related borrowings for 110,930 million tenge and 53,263 million Forfeiture of share- – – (8) – – (8) (5) (13) tenge in 2019 and 2018, respectively (Note 25). based payments As at December 31, 2017 709,345 243,876 83 1,295,091 3,665,192 5,913,587 870,018 6,783,605 Capitalization of borrowing costs Effect of adoption of IFRS – – – – (12,391) (12,391) (6) (12,397) 9 and IFRS 15 For the year ended December 31, 2019 the Group capitalized in the carrying amount of property, plant and equipment borrowing As at January 1, 2018 709,345 243,876 83 1,295,091 3,652,801 5,901,196 870,012 6,771,208 costs of 2,525 million tenge (2018: 21,715 million tenge, 2017: 26,532 million tenge) (Note 25).

Financial guarantee Net profit for the year – – – – 695,864 695,864 (2,353) 693,511

During 2019 the Group provided a financial guarantee for joint venture to secure its borrowings. At initial recognition of the fair value Other comprehensive – – – 469,017 (3,874) 465,143 9,673 474,816 income of the financial guarantee issued was recognized as addition to the carrying amount of investments in joint venture for the amount of 11,162 million tenge and was recognized as an increase in the carrying amount of investment in joint venture (2018 and 2017: nil) Total comprehensive – – – 469,017 691,990 1,161,007 7,320 1,168,327 income for the year (Note 19). Contribution to share 207,196 (203,082) – – – 4,114 – 4,114 capital (Note 24) Dividends (Note 24) – – – – (36,272) (36,272) (6,200) (42,472) Deputy Chairman of the Management Board – Chief Financial Officer Distributions to Samruk- – – – – (27,383) (27,383) – (27,383) Kazyna (Note 24) Managing director − financial controller Transactions with Samruk- – – – – (88,546) (88,546) – (88,546) Kazyna (Note 24) Chief accountant Acquisition – – – – – – 345 345 of subsidiaries Share buyback – – – – 148,473 148,473 (790,997) (642,524) by subsidiary (Note 24) As at December 31, 2018 9 1 6 , 5 4 1 40,794 8 3 1,764,108 4 , 3 4 1 , 0 6 3 7,062,589 8 0 , 4 8 0 7,143,069 Effect of adoption of IFRS – – – – (4,268) (4,268) (910) (5,178) 16 (Note 3) As at January 1, 2019 916,541 40,794 83 1,764,108 4,336,795 7,058,321 79,570 7,137,891 (restated)

172 173 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

NOTES TO THE CONSOLIDATED Net profit for the year – – – – 1,197,157 1,197,157 (38,700) 1,158,457

Other comprehensive – – – (32,361) (5,349) (37,710) 88 (37,622) (loss)/income FINANCIAL STATEMENTS Total comprehensive – – – (32,361) 1,191,808 1,159,447 (38,612) 1,120,835 income for the year Dividends (Note 24) – – – – (36,998) (36,998) (4,138) (41,136) FOR THE YEAR ENDED DECEMBER 31, 2019 Distributions to Samruk- – – – – (6,194) (6,194) – (6,194) Kazyna (Note 24) Transactions – – – – (14,184) (14,184) – (14,184) with Samruk-Kazyna (Note 24) 1. GENERAL Share buyback – – – – (1,991) (1,991) (473) (2,464) by subsidiary (Note 24) Contribution to share – – – – – – 1,908 1,908 JSC “National Company “KazMunayGas” (the “Company”, “KazMunayGas” or “Parent Company”) is oil and gas enterprise capital without change of the Republic of Kazakhstan, which was established on February 27, 2002 as a closed joint stock company pursuant to the Decree in ownership shares No. 811 of the President of the Republic of Kazakhstan dated February 20, 2002 and the Resolution of the Government As at December 31, 2019 916,541 40,794 83 1,731,747 5,469,236 8,158,401 38,255 8,196,656 of the Republic of Kazakhstan (the “Government”) No. 248 dated February 25, 2002. The Company was formed as a result of the merger of National Oil and Gas Company Kazakhoil CJSC (“Kazakhoil”) and National Company Transport Nefti i Gaza CJSC (“TNG”). As the result of the merger, all assets and liabilities, including ownership interest in all entities owned by these companies, Deputy Chairman of the Management Board – Chief Financial Officer have been transferred to KazMunayGas. The Company was reregistered as a joint stock company in accordance with the legislation of the Republic of Kazakhstan in March 2004. Managing director − financial controller

Chief accountant Starting from June 8, 2006, the sole shareholder of the Company was JSC “Kazakhstan Holding Company for State Assets Management “Samruk” (“Samruk”), which in October 2008 was merged with the state owned Sustainable Development Fund “Kazyna” and formed JSC “National Welfare Fund Samruk-Kazyna” (“Samruk-Kazyna”), now renamed to JSC “Sovereign Wealth Fund Samruk-Kazyna”. The Government is the sole shareholder of Samruk Kazyna. On August 7, 2015 National Bank of Republic of Kazakhstan (“National Bank of RK”) purchased 10% plus one share of the Company from Samruk-Kazyna.

As at December 31, 2019, the Company has an interest in 54 operating companies (2018: 57 and 2017: 52) (jointly the “Group”).

The Company has its registered office in the Republic of Kazakhstan, Nur-Sultan, Kunayev, 8.

The principal activity of the Group includes, but is not limited, to the following:

• participation in the Government activities relating to the oil and gas sector; • representation of the state interests in subsoil use contracts through interest participation in those contracts; and • corporate governance and monitoring of exploration, development, production, processing, transportation and sale of hydrocarbons and the designing, construction and maintenance of oil-and-gas pipeline and field infrastructure

The consolidated financial statements comprise the financial statements of the Company and its controlled subsidiaries (Note 33).

These consolidated financial statements of the Group were approved for issue by the Deputy Chairman of the Management Board – Chief Financial Officer, Managing director − financial controller and the Chief accountant on March 5, 2020. 2. BASIS OF PREPARATION

These consolidated financial statements have been prepared on a historical cost basis, except as described in the accounting policies and the notes to these consolidated financial statements. All values in these consolidated financial statements are rounded to the nearest millions, except when otherwise indicated.

The Group changed the presentation unit of the consolidated financial statements from thousands tenge to millions tenge since the Group believes that it is more relevant to users of consolidated financial statements.

174 175 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

STATEMENT OF COMPLIANCE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”). CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES NEW AND AMENDED STANDARDS AND INTERPRETATIONS The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followed The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant in the preparation of the Group’s annual consolidated financial statements for the year ended December 31, 2018, except to the Group consolidated financial statements are disclosed in Note 4. for the adoption of new standards and interpretations effective as of January 1, 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. FOREIGN CURRENCY TRANSLATION The Group applied in 2019, for the first time, IFRS 16 Leases. The nature and effect of these changes are disclosed below. Functional and presentation currency Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the consolidated Items included in the financial statements of each of the Group’s entities included in these consolidated financial statements financial statements of the Group. are measured using the currency of the primary economic environment in which the entities operate (“the functional currency”). The consolidated financial statements are presented in Kazakhstan tenge (“tenge” or “KZT”), which is the Company’s functional IFRS 16 Leases currency. IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC-15 Operating Leases Transactions and balances – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates leases under a single on-balance sheet model. of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating statement of comprehensive income. or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have an impact for leases where the Group is the lessor. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January the exchange rates at the date when the fair value is determined. 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. The Group elected to use the transition practical expedient allowing the standard Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in other The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date and upon initial comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. adoption of the standard, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive and lease contracts for which the underlying asset is of low value (‘low-value assets’), relied on its assessment of whether leases income. are onerous immediately before the date of initial application and used hindsight in determining the lease term where the contract contained options to extend or terminate the lease. Group Companies The effect of adoption IFRS 16 on consolidated financial statement as at January 1, 2019 is as follows: The results and financial position of all of the Group’s subsidiaries, joint ventures and associates (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into In millions of tenge As at January 1, 2019 the presentation currency as follows: Assets

• assets and liabilities for each statement of financial position presented are translated at the closing rate at that reporting date; Property, plant and equipment (Note 15) (524) • income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this average Right-of-use assets 44,398 is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and Advances for non-current assets (2,364) • all resulting exchange differences are recognized as a separate component of other comprehensive income. Total assets 41,510

Exchange rates Equity Retained earnings (4,268) Weighted average currency exchange rates established by the Kazakhstan Stock Exchange (“KASE”) are used as official currency Non-controlling interest (910) exchange rates in the Republic of Kazakhstan. (5,178)

The currency exchange rate of KASE as at December 31, 2019 was 382.59 tenge to 1 US dollar. This rate was used to translate Liabilities monetary assets and liabilities denominated in United States dollars (“US dollar”) as at December 31, 2019 (2018: 384.20 and 2017: Lease liabilities 46,688 332.33 tenge to 1 US dollar). The currency exchange rate of KASE as at March 5, 2020 was 380.53 tenge to 1 US dollar. Total equity and liabilities 41,510

176 177 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right Lease liabilities to control the use of an identified asset for a period of time in exchange for consideration. At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments (a) Nature of the effect of adoption of IFRS 16 to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual The Group has lease contracts for various items of plant, machinery, vehicles and other equipment. Before the adoption of IFRS 16, value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period to the Group; otherwise it was classified as an operating lease. Finance leases were capitalised at the commencement of the lease on which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses at the inception date at fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease the incremental borrowing rate. After the commencement date, the amount of lease liabilities is increased to reflect the accretion payments were apportioned between interest (recognised as finance costs) and reduction of the lease liability. In an operating lease, of interest and reduced for the lease payments made. the leased property was not capitalised and the lease payments were recognised as rent expense in profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under advances received, trade accounts payable Short-term leases and leases of low-value assets and other payables, respectively. The Group applies the short-term lease recognition exemption to its short-term leases of property, plant and equipment (i.e., those Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases, except for short-term leases that have a lease term of 12 months or less from the commencement date and from the date of the first adoption and do leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has not contain a purchase option). Lease payments on short-term leases and leases of low-value assets are recognised as expense been applied by the Group. on a straight-line basis over the lease term.

Leases previously classified as finance leases Significant judgement in determining the lease term of contracts with renewal options

The Group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option previously classified as finance leases (i.e., the right-of-use assets and lease liabilities equal the lease assets and liabilities recognised to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if under IAS 17). The requirements of IFRS 16 was applied to these leases from January 1, 2019. it is reasonably certain not to be exercised.

Leases previously accounted for as operating leases IFRIC Interpretation 23 Uncertainty over Income Tax Treatment

The Group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application for short-term leases and leases of low-value assets. The right-of-use assets for most leases were recognised based on the carrying of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: application. In some leases, the right-of-use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related advances received and accrued lease payments previously recognised. Lease liabilities were recognised based • Whether an entity considers uncertain tax treatments separately on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial • The assumptions an entity makes about the examination of tax treatments by taxation authorities application. • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances The lease liabilities as at January 1, 2019 can be reconciled to the operating lease commitments as of December 31, 2018 as follows: The Group determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. In millions of tenge Operating lease commitments as at December 31, 2018 71,902 The Group applies significant judgment in identifying uncertainties over income tax treatments. Since the Group operates Weighted average incremental borrowing rate as at 1 January 2019 8.12% in a complex multinational environment, it assessed whether the Interpretation had an impact on its consolidated financial statements. Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax positions, particularly Effect of discounting using incremental borrowing rate as at January 1, 2019 (20,840) those relating to transfer pricing. The Company’s and the subsidiaries’ tax filings in different jurisdictions include deductions Discounted operating lease commitments as at January 1, 2019 51,062 related to transfer pricing and the taxation authorities may challenge those tax treatments. The Group determined, based Less commitments relating to short-term leases and low-value assets (4,374) on its tax compliance and transfer pricing study, which it is probable that its tax treatments (including those for the subsidiaries) will be accepted by the taxation authorities. The Interpretation did not have an impact on the consolidated financial statements Add commitments relating to leases previously classified as finance leases 9,206 of the Group. Lease liabilities as at January 1, 2019 55,894 Amendments to IFRS 9: Prepayment Features with Negative Compensation (b) Summary of new accounting policies Under IFRS 9, a debt instrument can be measured at amortized cost or at fair value through other comprehensive income, Set out below are the new accounting policies of the Group upon adoption of IFRS 16, which have been applied from the date provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the of initial application: SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or circumstance that causes the early termination Right-of-use assets of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract.

The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available These amendments had no impact on the consolidated financial statements of the Group. for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct Amendments to IAS 19: Plan Amendment, Curtailment or Settlement costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Mostly right-of- use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.

178 179 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting The amendments clarify that an entity treats as part of general borrowings any borrowings originally made to develop a qualifying period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete. An entity period, an entity is required to determine the current service cost for the remainder of the period after the plan amendment, applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after 1 January the benefits offered under the plan and the plan assets after that event. An entity is also required to determine the net interest 2019, with early application permitted. The Group is assessing the potential effect of these amendments on its consolidated for the remainder of the period after the plan amendment, curtailment or settlement using the net defined benefit liability (asset) financial statements. Since the Group’s current practice is in line with these amendments, they had no impact on the consolidated reflecting the benefits offered under the plan and the plan assets after that event, and the discount rate used to remeasure that net financial statements of the Group. defined benefit liability (asset).

The amendments had no impact on the consolidated financial statements of the Group as it did not have any plan amendments, STANDARDS ISSUED BUT NOT YET EFFECTIVE curtailments, or settlements during the period. The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s Amendments to IAS 28: Long-term interests in associates and joint ventures financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). IFRS 17 Insurance Contracts This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. In May 2017, the IASB issued IFRS 17 Insurance Contracts. IFRS 17 establishes a single framework for the accounting for insurance The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, contracts and contains requirements for related disclosures. The new standard replaces IFRS 4 Insurance Contracts. The standard or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture is effective for annual periods beginning on or after January 1, 2021. The Group does not expect the standard to have a material that arise from applying IAS 28 Investments in Associates and Joint Ventures. impact on the consolidated financial statements.

Since the Group’s current practice is in line with these amendments, they had no impact on the consolidated financial statements Financial reporting framework of the Group. In March 2018, the IASB issued a revised version of Conceptual Framework for Financial Reporting. In particular, the revised version Annual Improvements 2015-2017 Cycle introduces new definitions of assets and liabilities, as well as amended definitions of income and expenses. The new version is effective for annual periods beginning on or after January 2020. The Group does not expect the revised version of Conceptual IFRS 3 Business Combinations Framework to have a material impact on the consolidated financial statements.

The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements Amendments to IFRS 3: Definition of a Business for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation. An In October 2018, the IASB issued amendments to IFRS 3 Business Combinations. The amendments enhance definition of a business entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first set out by the standard. The amendments are effective for acquisitions to occur on or after January 1, 2020; earlier application annual reporting period beginning on or after 1 January 2019, with early application permitted. is permitted. Since the amendments apply prospectively to transactions or other events after the date of first application the Group will not be affected by these. These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where joint control over the former joint operation is obtained. Amendments to IAS 1 and IAS 8: Definition of Materiality

IFRS 11 Joint Arrangements In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The amendments to IAS 1 and IAS 8 introduce new definition of materiality. The amendments An entity that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation are effective on or after January 1, 2020; earlier application is permitted. The Group does not expect the amendments to have in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously a material impact on the consolidated financial statements. held interests in that joint operation are not remeasured. An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application IFRS 7 Financial Instruments: Disclosures and IFRS 9 Financial Instruments – interest rates permitted. In September 2019, the IASB issued amendments to IFRS 7 Financial instruments: Disclosures and IFRS 9 Financial instruments These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where a joint named Interest Rate Benchmark Reform. The amendments provide relief from certain requirements of hedge accounting, control over the former joint operation is obtained. as their fulfillment can lead to discontinuation of hedge accounting due to uncertainty caused by the reform. The amendments are effective on or after January 1, 2020; earlier application is permitted. The Group does not expect the amendments to have IAS 12 Income Taxes a material impact on the consolidated financial statements.

The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events IAS 1 Presentation of Financial Statements that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where it originally recognised those past In January 2020, the IASB issued amendments to IAS 1 Presentation of Financial Statements named Classification of Liabilities transactions or events. An entity applies the amendments for annual reporting periods beginning on or after 1 January 2019, as Current or Non-current. The amendments clarify requirements for classifying liabilities as current or non-current. with early application permitted. When the entity first applies those amendments, it applies them to the income tax consequences The amendments are effective on or after January 1, 2022; earlier application is permitted. The Group does not expect of dividends recognised on or after the beginning of the earliest comparative period. Since the Group’s current practice is in line the amendments to have a material impact on the consolidated financial statements, as the Group already applies criteria set with these amendments, they had no impact on the consolidated financial statements of the Group. by the amendments.

IAS 23 Borrowing Costs The Group does not plan for early adoption in respect of above-mentioned new standards and amendments to existing standards to which this option is available.

180 181 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

CHANGES IN ACCOUNTING POLICIES RELATED TO PRESENTATION Changes in presentation of the consolidated cash flow statement from direct to indirect method was applied retrospectively, also as at December 31, 2019, viewing that one of the Group’s principal activities is the representation of the State interests in subsoil use In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Group decided to apply voluntary contracts through interest participation in those contracts through joint ventures, the Group decided to show dividends received changes in accounting policies related to presentation of consolidated financial statements and elected to present its statement from joint ventures and associates within operating cash flows as dividends received in accordance with IAS 7. of comprehensive income based on nature and cash flow statement using the indirect method to improve presentation of financial information for the current year and increase the comparability of the Group consolidated financial statements with the industry peers. Reclassifications do not affect net profit or comprehensive income for the year or equity. BASIS OF CONSOLIDATION

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December Changes in presentation of the consolidated statement of comprehensive income from function based to nature based approach led 31, 2019. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee to reclassification of certain line items below: and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities For the year ended За годы, закончившиеся 31 декабря of the investee); exposure, or rights, to variable returns from its involvement with the investee, and; the ability to use its power December 31, over the investee to affect its returns. According to the issued Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group consolidated financial has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances statements Reclassified in assessing whether it has power over an investee, including: the contractual arrangement with the other vote holders of the investee; rights arising from other contractual arrangements; the Group’s voting rights and potential voting rights. In millions of tenge Notes 2018 2017 2018 2017

Cost of purchased oil, gas, petroleum products [A] — — 4,312,958 2,729,514 The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one and other materials or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary Production expenses [B] — — 604,475 624,346 and ceases when the Group loses control over the subsidiary. Assets, liabilities, revenue and expenses of a subsidiary acquired Taxes other than income tax [C] — — 477,732 354,447 or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Depreciation, depletion and amortization [D] — — 285,186 238,021

Cost of sales [A], [B], [C], [D] 5,353,492 3,704,457 — — The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent General and administrative expenses [C], [D] 247,128 200,434 213,485 163,780 accounting policies. Profit or loss and each component of other comprehensive income are attributable to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interest having a deficit Transportation and selling expenses [C], [D] 659,447 440,568 370,777 238,063 balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into Other expenses [D] 24,144 33,596 23,283 34,767 line with the Group’s accounting policies. All intra-group balances, transactions, unrealized gains and losses resulting from intra- Loss on disposal of property, plant and equipment, [D] 3,517 3,815 — — group transactions and dividends are eliminated in full. A change in the ownership interest of a subsidiary, without a loss of control, intangible assets and investment property, net is accounted for as an equity transaction. Impairment of assets held for sale [D] 168 68 — — If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest 6,287,896 4,382,938 6,287,896 4,382,938 and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised

1. [A] The Group elected to present Cost of purchased oil, gas, petroleum products and other materials as a separate line item. at fair value. 2. [B] Other line items previously presented within cost of sales, except for Cost of purchased oil, gas, petroleum products and other materials, taxes and depreciation, were aggregated and shown as a separate line item of the consolidated statement of comprehensive income. 3. [C] The Group elected to aggregate mineral extraction and other taxes from cost of sales (2018: 187,606 million tenge, 2017: 152,739 million tenge), general and administrative expenses (2018: 13,475 million tenge, 2017: 13,223 million tenge), transportation and selling expenses (2018: 276,651 million tenge, 2017: 188,485 BUSINESS COMBINATIONS AND GOODWILL million tenge) and present as a separate line item of the consolidated profit and loss. The components of the line item were not altered and corresponds to the prior year issued consolidated financial statements. 4. [D] The Group elected to aggregate Depreciation, depletion and amortization charges from cost of sales (2018: 248,453 million tenge, 2017: 197,858 million tenge), Объединения бизнеса учитываются с использованием метода приобретения. Стоимость приобретения оценивается general and administrative expenses (2018: 20,168 million tenge, 2017: 23,432 million tenge), transportation and selling expenses (2018: 12,019 million tenge, 2017: 14,020 million tenge), other expenses (2018: 4,546 million tenge, 2017: 2,711 million tenge) and present as a separate line item of the consolidated profit and loss. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate Additionally, Loss on disposal of property, plant and equipment, intangible assets and investment property and Impairment of assets held for sale were reclassed of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest to Other expenses. 5. in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included The Group performed reclasses below: in general and administrative expenses.

Aof 31 December When the Group acquires a business, it assesses the financial assets acquired and liabilities assumed for appropriate classification According to the issued consolidated financial Reclassified and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition statements date. This includes the separation of embedded derivatives in host contracts by the acquiree.

In millions of tenge 2018 2017 2018 2017 Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent Other current liabilities 236,988 202,445 236,163 201,940 consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognised in the statement of profit or loss Financial guarantees 1,831 1,171  — in accordance with IFRS 9. If the contingent consideration is not within the scope of IFRS 9, it is measured at fair value through profit Lease liabilities   2,656 1,676 and loss. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within 238,819 203,616 238,819 203,616 equity.

182 183 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised INVESTMENT IN ASSOCIATES AND JOINT VENTURES for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether An associate is an entity over which the Group has significant influence. Significant influence is the power to participate it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure in the financial and operating policy decisions of the investee, but which does not comprise control or joint control over those the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets policies. acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating decisions about the relevant activities require unanimous consent of the parties sharing control. units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal The Group’s investments in its joint ventures and associates are accounted for using the equity method. Under the equity method, of the operation. Goodwill disposed off in this circumstance is measured based on the relative values of the operation disposed the investment in a joint venture or an associate is initially recognized at cost. The carrying amount of the investment is adjusted of and the portion of the cash-generating unit retained. to recognize changes in the Group’s share of net assets of the joint venture or associate since the acquisition date. Goodwill relating to the joint venture or associate is included in the carrying amount of the investment and is neither amortized nor individually tested Business combinations achieved in stages for impairment.

The acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value The consolidated statement of comprehensive income reflects the Group’s share of the results of operations of the joint venture at the acquisition date through profit or loss. or associate. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the joint venture or associate, the Group recognizes its share of any changes, when applicable, In a business combination achieved in stages the acquirer recognises goodwill as of the acquisition date measured as the excess in the consolidated statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group of (a) over (b) below: and the joint venture or associate are eliminated to the extent of the interest in the joint venture or associate.

(a) the aggregate of: The aggregate of the Group’s share in profit or loss of a joint venture and an associate is shown on the face of the consolidated • the consideration transferred measured in accordance with this IFRS 3 Business Combinations, which generally requires statement of comprehensive income and represents profit or loss after tax and non-controlling interest in the subsidiaries acquisition-date fair value; of the joint venture or associate. The financial statements of the joint venture or associate are prepared for the same reporting • the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS; and period as the Group. When necessary, adjustments are made to bring their accounting policies in line with those of the Group. • the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. investment in its joint venture or associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture or associate is impaired. If there is such evidence, the Group calculates the amount Acquisition of subsidiaries from parties under common control of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, and then recognizes the loss as ‘Impairment of investment in joint venture or associate’ in the consolidated statement of comprehensive Acquisitions of subsidiaries from parties under common control are accounted for using the pooling of interest method. income.

The assets and liabilities of the subsidiary transferred under common control are recorded in the consolidated financial statements Upon loss of joint control over the joint venture or significant influence over the associate, the Group measures and recognizes any at the carrying amounts of the transferring entity (the Predecessor) at the date of the transfer. Related goodwill, if any, inherent retained investment at its fair value. Any difference between the carrying amount of the joint venture or associate upon loss of joint in the Predecessor’s original acquisition is also recorded in the consolidated financial statements. Any difference between the total control or significant influence and the fair value of the retained investment and proceeds from disposal is recognized in profit book value of net assets, including the Predecessor’s goodwill, and the consideration paid is accounted for in the consolidated or loss. financial statements as an adjustment to equity.

The consolidated financial statements, including corresponding figures, are presented as if the subsidiary had been acquired CURRENT VERSUS NON-CURRENT CLASSIFICATION by the Group on the date it was originally acquired by the Predecessor. The Group presents assets and liabilities in the consolidated statement of financial position based on current/non-current classification. An asset as current when it is: JOINT OPERATIONS • expected to be realized or intended to sold or consumed in normal operating cycle; • held primarily for the purpose of trading; A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights • expected to be realized within 12 (twelve) months after the reporting period; or to the assets and obligations for the liabilities, relating to the arrangement. • cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 (twelve) months after In relation to its interests in joint operations, the Group recognizes its:: the reporting period.. • Assets, including its share of any assets held jointly • Liabilities, including its share of any liabilities incurred jointly All other assets are classified as non-current. • Revenue from the sale of its share of the output arising from the joint operation A liability is current when: : • Share of the revenue from the sale of the output by the joint operation • it is expected to be settled in normal operating cycle; • Expenses, including its share of any expenses incurred jointly • it is held primarily for the purpose of trading; • it is due to be settled within 12 (twelve) months after the reporting period; or • there is no unconditional right to defer the settlement of the liability for at least 12 (twelve) months after the reporting period.

The Group classifies all other liabilities as non-current. Deferred tax assets and liabilities are always classified as non current assets and liabilities.

184 185 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

OIL AND NATURAL GAS EXPLORATION, EVALUATION AND DEVELOPMENT EXPENDITURE Property, plant and equipment other than oil and gas assets and land principally comprise buildings, machinery and equipment, vehicles and others that are depreciated on a straight-line basis over the expected remaining useful average lives as follows: Costs incurred before obtaining subsoil use rights (licenses) Refinery assets 4-100 years

Costs incurred before obtaining full subsoil use rights (licenses) are expensed in the period in which they are incurred, except when Pipelines 2-30 years costs are incurred after signing preliminary agreements with the Government of the Republic of Kazakhstan, in such cases costs Buildings and improvements 2-100 years incurred after this date are capitalized within exploration and evaluation. Machinery and equipment 2-30 years

Subsoil use rights and property acquisition costs Vehicles 3-35 years Other 2-20 years Exploration and production subsoil use rights and related property acquisition costs are capitalized within exploration Land not depreciated and evaluation assets and subclassified as intangible assets. Each property under exploration and appraisal is reviewed on an annual basis to confirm that drilling activity is planned and it is not impaired. If no future activity is planned, the carrying amount of the exploration subsoil use right and related property acquisition costs is written off. Upon determination The expected useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful of economically recoverable reserves (‘proved reserves’ or ‘commercial reserves’) and internal approval of development, lives are accounted for prospectively. the carrying amount of the subsoil use right and related property acquisition costs held on a field by field basis is aggregated with exploration and evaluation assets and transferred to oil and gas assets or intangible assets. The carrying value of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Exploration and evaluation costs An item of property, plant and equipment, inclusive of production wells which stop producing commercial quantities Once the legal right to explore has been acquired, geological and geophysical exploration costs and costs directly associated of hydrocarbons and are scheduled for abandonment, is derecognized upon disposal or when no future economic benefits with exploration and appraisal wells, including unsuccessful development or delineation wells are capitalized as exploration are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated and evaluation intangible or tangible assets, according to the nature of the costs, until the drilling of the well is complete as the difference between the net disposal proceeds and the carrying amount of the item) is included in the profit or loss and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs and payments in the period the item is derecognized. made to contractors. If no reserves are found, the exploration and evaluation asset is tested for impairment, if extractable hydrocarbons are found and, subject to further appraisal activity, which may include the drilling of further wells, are likely to be developed commercially; the costs continue to be carried as an asset while sufficient/continued progress is made in assessing INTANGIBLE ASSETS the commerciality of the hydrocarbon reserves. All such carried costs are subject to technical, commercial and management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract Intangible assets are stated at cost, less accumulated amortization and accumulated impairment losses. Intangible assets include value from the discovery. When this is no longer the case, the assets are written off. When proved reserves of hydrocarbons expenditure on acquiring subsoil use rights for oil and natural gas exploration, evaluation and development, computer software are determined and development is sanctioned, the relevant expenditure is transferred to oil and gas assets after impairment and goodwill. Intangible assets acquired separately from a business are carried initially at cost. The initial cost is the aggregate is assessed and any resulting impairment loss is recognized. amount paid and the fair value of any other consideration given to acquire the asset.

Development costs Intangible assets, except for goodwill and subsoil use rights, are amortized on a straight-line basis over the expected remaining useful life. The expected useful lives of the assets are reviewed on an annual basis and, if necessary, changes in useful lives Expenditures on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling are accounted for prospectively. Computer software costs have an estimated useful life of 3 to 7 years. The carrying value of development wells, are capitalized within oil and gas assets. of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment annually (as at December 31) and when circumstances indicate that the carrying value may be impaired. OIL AND GAS ASSETS AND OTHER PROPERTY, PLANT AND EQUIPMENT Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating unit (or group of cash- Oil and gas assets and other property, plant and equipment are stated at cost less accumulated depreciation, depletion generating units) to which the goodwill relates. Where the recoverable amount of the cash generating unit is less than their carrying and impairment (“DD&A”). amount an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

The initial cost of an asset comprises its purchase price or construction cost, borrowing cost for long-term construction or development project, if recognition criteria is met, any costs directly attributable to bringing the asset into operation IMPAIRMENT OF NON-FINANCIAL ASSETS and the initial estimate of decommissioning obligation, if there is any. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s Oil and gas assets are depreciated using a unit-of-production method, whereas tangible assets are depreciated over proved recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs to sell and its value in use developed reserves and intangible assets – over proved reserves. Certain oil and gas assets with useful lives less than the remaining and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those life of the fields or term of the subsoil use contracts are depreciated on a straight-line basis over useful lives. from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses of continuing operations are recognized in the consolidated statement of comprehensive income in those expense categories consistent with the function of the impaired asset.

186 187 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each • the amount deducted from the cost of the asset shall not exceed its carrying amount. If a decrease in the provision exceeds of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period the carrying amount of the asset, the excess is recognized immediately in the consolidated statement of comprehensive income; of 5 (five) years. For longer periods, a long-term growth rate is calculated and applied to projected future cash flows after the fifth and year. • if the adjustment results in an addition to the cost of an asset, the Group considers whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If it is such an indication, the Group tests the asset for impairment For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously by estimating its recoverable amount, and accounts for any impairment loss, in accordance with IAS 36. recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or cash-generating unit’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal FINANCIAL ASSETS is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of accumulated depreciation, had no impairment loss been recognized for the asset in prior years. INITIAL RECOGNITION AND MEASUREMENT Such reversal is recognized in the consolidated statement of comprehensive income.. Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVPL).

IMPAIRMENT OF EXPLORATION AND EVALUATION ASSETS The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant Exploration and evaluation assets are tested for impairment when reclassified to oil and gas development tangible or intangible financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset assets or whenever facts and circumstances indicate impairment. One or more of the following facts and circumstances indicate at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that the Group should test exploration and evaluation assets for impairment (the list is not exhaustive): that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15. • the period for which the Group entity has the right to explore and appraise in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed; In order for a debt financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise • substantive expenditure on the further exploration for and evaluation of hydrocarbon resources in the specific area is neither to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment budgeted nor planned; is referred to as the SPPI test and is performed at an instrument level. • exploration for and evaluation of hydrocarbon resources in the specific area have not led to the discovery of commercial viable quantities of hydrocarbon resources and the Group entity has decided to discontinue such activities in the specific area; The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash • sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. assets, or both.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered SUBSEQUENT MEASUREMENT principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale For purposes of subsequent measurement, financial assets are classified in two categories: is highly probable and the asset or disposal group is available for immediate sale in its present condition. • Financial assets at amortised cost (debt instruments) • Financial assets at fair value through profit or loss Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. The Group does not have financial assets at fair value through other comprehensive income.

In the consolidated statement of comprehensive income of the reporting period, and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from income and expenses from continuing FINANCIAL ASSETS AT AMORTISED COST (DEBT INSTRUMENTS) operations, down to the level of profit after taxes, even when the Group retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated statement of comprehensive income. This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met: Property, plant and equipment and intangible assets once classified as held for sale are not depreciated or amortized.. • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and ASSET RETIREMENT OBLIGATION (DECOMMISSIONING) • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding Provision for decommissioning is recognized in full, on a discounted cash flow basis, when the Group has an obligation to dismantle and remove a facility or an item of plant, property and equipment and to restore the site on which it is located, Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject and when a reasonable estimate of that provision can be made. The amount recognized is the present value of the estimated to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. future expenditure determined in accordance with local conditions and requirements. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also created. This asset is subsequently depreciated as part of the capital The Group’s financial assets at amortised cost include trade and other receivables, loans due from related parties and bank costs of the production and transportation facilities based on the appropriate depreciation method. deposits. Changes in the measurement of an existing decommissioning provision that result from changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle the obligation, or change in the discount rate, is accounted for so that: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS • changes in the provision are added to, or deducted from, the cost of the related asset in the current period; Financial assets at fair value through profit or loss include certain loans due from related parties, which contain embedded derivative financial instruments, and coupon bonds included in other financial assets mandatorily required to be measured at fair

188 189 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

value. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair INVENTORIES value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit Inventories are stated at the lower of cost and net realizable value on a first-in first-out (“FIFO”) basis. Cost includes all costs incurred or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch. in the normal course of business in bringing each product to its present location and condition. The cost of crude oil and refined products is the cost of production, including the appropriate proportion of depreciation, depletion and amortization and overheads Financial assets at fair value through profit or loss are carried in the consolidated statement of financial position at fair value based on normal capacity. Net realizable value of crude oil and refined products is based on estimated selling price in the ordinary with net changes in fair value recognised in the consolidated statement of comprehensive income within the profit and loss. . course of business less any costs expected to be incurred to complete the sale.

DERECOGNITION VALUE ADDED TAX (VAT)

A financial asset is primarily derecognised (removed from the consolidated statement of financial position) when: The tax authorities permit the settlement of VAT on sales and purchases on a net basis. VAT receivable represents VAT on domestic • The rights to receive cash flows from the asset have expired or purchases net of VAT on domestic sales. Export sales are zero rated. • The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either CASH AND CASH EQUIVALENTS – the Group has transferred substantially all the risks and rewards of the asset, or – the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control Cash and cash equivalents include cash in bank and cash on hand, demand deposits with banks with original maturities of 3 (three) of the asset. months or less.

When the Group has transferred its rights to recieve cash flows from an assets or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained FINANCIAL LIABILITIES substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. INITIAL RECOGNITION AND MEASUREMENT The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans borrowings retained. and payables, or as derivatives financial instruments.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original All financial liabilities are recognized initially at fair value and in the case of loans and borrowings, plus directly attributable carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. transaction costs.

The Group’s financial liabilities include trade and other payables, loans and borrowings and derivative financial instruments. IMPAIRMENT OF FINANCIAL ASSETS SUBSEQUENT MEASUREMENT The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit The measurement of financial liabilities depends on their classification as follows: or loss. Financial liabilities at fair value through profit or loss ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a as effective hedging instruments. 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a Gains or losses on liabilities held for trading are recognized in profit or loss. lifetime ECL). The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss. For trade and other receivables the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has Trade and other payables established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the EIR.

The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, Loans and borrowings the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR. Gains by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. and losses are recognized in the consolidated statement of comprehensive income when the liabilities are derecognized as well as through the EIR amortization process.

Amortized cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortization is included in finance costs.

190 191 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state – for at least 12 (twelve) months after the reporting date. Borrowing costs that are directly attributable to the acquisition, construction managed retirement benefit schemes are dealt with as defined contribution plans where the Group’s obligations under the scheme or production of a qualifying asset are capitalized as part of the cost of that asset. Other borrowing costs are recognized are equivalent to those arising in a defined contribution retirement benefit plan. as an expense when incurred. Long-term employee benefits Financial guarantee contracts The Group provides long-term employee benefits to employees before, on and after retirement, in accordance with the collective Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder agreements between the Group entities and their employees. The collective agreement provides for certain one-off retirement for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt payments, financial aid for employees’ disability, anniversaries, funeral and other benefits. The entitlement to benefits is usually instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that conditional on the employee remaining in service up to retirement age. are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative The expected costs of the benefits associated with one-off retirement payments are accrued over the period of employment amortisation. using the same accounting methodology as used for defined benefit post-employment plans with defined payments upon the end of employment. Actuarial gains and losses arising in the year are taken to other comprehensive income. For this purpose, actuarial DERECOGNITION gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. of differences between the previous actuarial assumptions and what has actually occurred. Other movements are recognised in the current period, including current service cost, any past service cost and the effect of any curtailments or settlements. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original The most significant assumptions used in accounting for defined benefit obligations are discount rate and mortality assumptions. liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the consolidated statement of comprehensive income as finance costs. The mortality assumption OFFSETTING OF FINANCIAL INSTRUMENTS is used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities. Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net Employee benefits other than one-off retirement payments are considered as other long-term employee benefits. The expected basis, or to realise the assets and settle the liabilities simultaneously. cost of these benefits is accrued over the period of employment using the same accounting methodology as used for the defined benefit plan. Actuarial gains and losses on other long-term employee benefits are recognised in the profit or loss. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted These obligations are valued by independent qualified actuaries on an annual basis. market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. REVENUE RECOGNITION For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that Revenues are recognized when (or as) the Group satisfies a performance obligation by transferring a promised good or service (i.e. is substantially the same; a discounted cash flow analysis or other valuation models. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset, which usually occurs when the title is passed, provided that the contract price is fixed or determinable and collectability of the receivable is reasonably assured. Specifically, domestic sales of crude oil and gas, as well as petroleum products and materials are usually recognized when title PROVISIONS passes. For export sales, title generally passes at the border of the Republic of Kazakhstan. Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts, volume rebates and reimbursable Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable taxes. that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects a provision to be reimbursed, for example under an insurance Sales of support services are recognized as services are performed provided that the service price can be determined and no contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. significant uncertainties regarding the receipt of revenues exist.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows Interest income and costs at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. For all financial instruments measured at amortised cost and interest income is recorded using the effective interest rate (EIR). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument Provision for obligations to the Government or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the consolidated statement of comprehensive income. The Government assigns various sponsorship and financing obligations to the Group. Management of the Group believes that such Government’s assignments represent constructive obligations of the Group and require recognition on the basis of respective Trade receivables resolution of the Government. Furthermore, as the Government is the ultimate controlling party of the Group, the expenditures on these assignments are recognized as other distributions to the Shareholders directly in the equity, in the consolidated financial A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time statements. is required before payment of the consideration is due).

Contract liabilities EMPLOYEE BENEFITS A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration Pension scheme (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognized when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract.

192 193 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

EXPENSE RECOGNITION Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation Expenses are recognized as incurred and are reported in the consolidated financial statements in the period to which they relate authority. on an accrual basis. Deferred tax assets are recognized for all allowances and unused tax losses to the extent that it is probable that taxable temporary differences and business nature of such expenses will be proved. Significant management judgment is required to determine INCOME TAXES the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Income tax for the year comprises current income tax, excess profit tax and deferred tax.

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered EQUITY from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Non-controlling interest

Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity of comprehensive income. of the Company’s owners. Total comprehensive income is attributed to the Company’s owners and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Excess profit tax (“EPT”) is treated as an income tax and forms part of income tax expense. In accordance with the applicable tax legislation, the Group accrues and pays EPT in respect of each subsoil use contract, at varying rates based on the ratio of aggregate Dividends annual income to deductions for the year for a particular subsoil use contract. The ratio of aggregate annual income to deductions in each tax year triggering the application of EPT is 1.25:1. EPT rates are applied to the part of the taxable income (taxable income Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before after corporate income tax and allowable adjustments) related to each subsoil use contract in excess of 25% of the deductions or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after attributable to each contract. the reporting date but before the consolidated financial statements are authorized for issue.

Deferred tax is calculated with respect to both corporate income tax (“CIT”) and EPT. Deferred EPT is calculated on temporary Distributions to the Shareholders differences for assets allocated to subsoil use contracts at the expected rate of EPT to be paid under the contract. Expenditures incurred by the Group based on the respective resolution of the Government based on the RK President’s charge Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases or decision and instructions of Samruk-Kazyna are accounted for as other distributions through equity. Such expenditures include of assets and liabilities and their carrying amounts for financial reporting purposes. costs associated with non-core activity of the Group (construction of social assets) to be transferred to the Shareholder.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:: • where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that SUBSEQUENT EVENTS is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and The results of post-year-end events that provide evidence of conditions that existed at the reporting date (adjusting events) • in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint are reflected in the consolidated financial statements. Post-year-end events that are not adjusting events are disclosed in the notes ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary to the consolidated financial statements when material. differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused 4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilized except: The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates • where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting liabilities and assets, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes profit nor taxable profit or loss; and that require a material adjustment to the carrying amount of the asset or liability affected in future periods. • in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. OIL AND GAS RESERVES

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no Oil and gas reserves are a material factor in the Group’s computation of depreciation, depletion and amortization expenses. longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. The Group estimates its oil and gas reserves in accordance with the methodology of the Society of Petroleum Engineers (“SPE”). Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it has become In estimating its reserves under SPE methodology, the Group uses long-term planning prices. Using planning prices for estimating probable that future taxable profit will allow the deferred tax asset to be recovered. proved reserves removes the impact of the volatility inherent in using year-end spot prices. Management believes that long-term planning price assumptions, which are also used by management for their business planning and investment decisions are more Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset consistent with the long-term nature of the upstream business and provide the most appropriate basis for estimating oil and gas is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the reporting reserves. date. All reserve estimates involve some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement and engineering data available at the time of the estimate and the interpretation of this data. of comprehensive income. The relative degree of uncertainty can be conveyed by placing reserves into one of two principal classifications, either proved or unproved. Proved reserves are more certain to be recovered than unproved reserves and may be further sub-classified as developed and undeveloped to denote progressively increasing uncertainty in their recoverability.

194 195 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Estimates are reviewed and revised annually. Revisions occur due to the evaluation or re-evaluation of already available geological, ASSETS RETIREMENT OBLIGATIONS reservoir or production data, availability of new data, or changes to underlying price assumptions. Reserve estimates may also be revised due to improved recovery projects, changes in production capacity or changes in development strategy. Proved developed Oil and gas production facilities reserves are used to calculate the unit of production rates for Depreciation Depletion & Amortization (DD&A) in relation to oil and gas production assets. The Group has included in proved reserves only those quantities that are expected to be produced Under the terms of certain subsoil use contracts, legislation and regulations the Group has legal obligations to dismantle during the initial subsoil use contract period. This is due to the uncertainties surrounding the outcome of such renewal procedures, and remove tangible assets and restore the land at each production site. Specifically, the Group’s obligation relates to the ongoing since the renewal is ultimately at the discretion of the Government. An increase in the Group’s subsoil use contract periods closure of all non-producing wells and final closure activities such as removal of pipes, buildings and recultivation of the contract and corresponding increase in reported reserves would generally lead to lower DD&A expense and could materially affect earnings. territories, and also obligations to dismantle and remove tangible assets and restore territory at each production site. Since A reduction in proved developed reserves will increase DD&A expense (assuming constant production), reduce income and could the subsoil use contract terms cannot be extended at the discretion of the Group, the settlement date of the final closure obligations also result in an immediate write-down of the property’s book value. Given the relatively small number of producing fields, has been assumed to be the end of each subsoil use contract period. If the asset retirement obligations were to be settled at the end it is possible that any changes in reserve estimates year on year could significantly affect prospective charges for DD&A. of the economic life of oil and gas field, the recorded obligation would increase significantly due to the inclusion of all abandonment and closure costs. The extent of the Group’s obligations to finance the abandonment of wells and for final closure costs depends on the terms of the respective subsoil use contracts and current legislation. RECOVERABILITY OF OIL AND GAS ASSETS, DOWNSTREAM, REFINING AND OTHER ASSETS Where neither subsoil use contracts nor legislation include an unambiguous obligation to undertake or finance such final The Group assesses assets or CGU for impairment whenever events or changes in circumstances indicate that the carrying abandonment and closure costs at the end of the subsoil use contract term, no liability has been recognized. There is some amount of an asset may not be recoverable. Where an indicator of impairment exists, a formal estimate of the recoverable amount uncertainty and significant judgment involved in making such a determination. Management’s assessment of the presence is made, which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use or absence of such obligations could change with shifts in policies and practices of the Government or in the local industry practice. of estimates and assumptions such as long-term oil prices, discount rates, future capital requirements, operating performance (including production and sales volumes) that are subject to risk and uncertainty. Where the carrying amount of an asset The Group calculates asset retirement obligations separately for each contract. The amount of the obligation is the present value or CGU exceeds its recoverable amount, the asset/CGU is considered to be impaired and is written down to its recoverable of the estimated expenditures expected to be required to settle the obligation adjusted for expected inflation and discounted using amount. In assessing recoverable amount the estimated future cash flows are adjusted for the risks specific to the asset group average long-term risk-free interest rates for emerging market sovereign debt adjusted for risks specific to the Kazakhstan market. and are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Fair value less costs to sell is identified as the price that would be received to sell the asset At each reporting date the Group reviews site restoration provisions, and adjusts them to reflect the current best estimate in an orderly transaction between market participants and does not reflect the effects of factors that may be specific to the entity in accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities. and not applicable to entities in general. Estimating the future closure costs involves significant estimates and judgments by management. Most of these obligations As at December 31, 2019, 2018 and 2017, the Group performed its annual impairment tests of downstream, refining and other are many years in the future and, in addition to ambiguities in the legal requirements, the Group’s estimate can be affected assets due to existence of impairment indicators. The Group considered forecasted refinery margins and production volumes, by changes in asset removal technologies, costs and industry practice. Uncertainties related to the final closure costs are mitigated among other factors, when reviewing for indicators of impairment. As a result of the impairment analysis of the recoverable by the effects of discounting the expected cash flows. The Group estimates future well abandonment cost using current year prices amount of downstream, refining and other assets an impairment charges were recognized in the consolidated financial statements and the average long-term inflation rate. for the year ended December 31, 2019 and 2018 (Note 13). The long-term inflation and discount rates used to determine the obligation in the consolidated statement of financial position As of December 31, 2019, 2018 and 2017 the Group has material goodwill related to acquisitions of Pavlodar oil chemistry refinery across the Group entities at December 31, 2019 were in the range from 2.01% to 5.49% and from 4.43% to 8.95%, respectively, (2018: LLP (“PNHZ”) of 88,553 million tenge. from 2.02% to 5.96% and from 5.5% to 10.00%, respectively, 2017: from 2.01% to 5.57% and from 5.17% to 10.00%). As at December 31, 2019 the carrying amounts of the Group’s asset retirement obligations relating to decommissioning of oil and gas facilities were The Group performed annual impairment test of the goodwill related to acquisition of PNHZ in December 2019, 2018 and 2017. 54,165 million tenge (December 31, 2018: 36,288 million tenge and 2017: 35,406 million tenge, respectively) (Note 26). The Group considers the forecast for oil tolling volumes, oil tolling tariffs, capital expenditures, among other factors, when reviewing for indicators of impairment. Major oil and gas pipelines

PNHZ calculates recoverable amount using a discounted cash flow model. The discount rate of 2019: 9.7% (2018: 9.7%, 2017: 13.25%) According to the Law of the Republic of Kazakhstan On Major Pipelines which was made effective on July 4, 2012 mainly was calculated on the weighted average cost of capital before taxes. The weighted average cost of capital takes into account the Group’s two subsidiaries, JSC KazTransOil and Intergas Central Asia JSC, the subsidiary of KazTransGas JSC, have legal obligation both borrowed funds and own equity. The cost of equity is derived from the expected return on investment. The cost of debt to decommission its major oil pipelines at the end of their operating life and to restore the land to its original condition. Asset capital is based on interest-bearing loans. The inherent risk was included by applying an individual beta factor. The beta factor retirement obligation is calculated based on estimate of the work to decommission and rehabilitate. As at December 31, 2019, was estimated based on the publicly available market data. Forecasted cash flows till to 2028 were based on five-years business the carrying values of the Group’s asset retirement obligations relating to decommissioning of pipelines and land were 100,229 plan of PNHZ 2020-2024, which assumes current management estimates on potential changes in operating and capital costs. million tenge (December 31, 2018: 79,948 million tenge and December 31, 2017: 65,140 million tenge) (Note 26). The significant part of those cash flows after 2024 was forecasted by applying expected inflation rate of 2019: 5.49% (2018: 3.53%, 2017: 3.89%), excluding capital costs, which are based on the best estimate of management as of valuation date. ENVIRONMENTAL REMEDIATION As at December 31, 2019, 2018 and 2017 the recoverable amount of goodwill, which was determined based on value in use, exceeded its book value, as such no impairment of PNHZ goodwill was recognised. The Group also makes judgments and estimates in establishing provisions for environmental remediation obligations. Environmental expenditures are capitalized or expensed depending upon their future economic benefit. Expenditures that relate Sensitivity to changes in assumptions to an existing condition caused by past operations and do not have a future economic benefit are expensed.

Results of the assessment of recoverable amount of goodwill from acquisition of PNHZ are sensitive to changes in key assumptions, Liabilities are determined based on current information about costs and expected plans for remediation and are recorded in particular, assumptions related to changes in discount rate and target EBITDA in terminal period. Increase in discount rates on an undiscounted basis if the timing of the procedures has not been agreed with the relevant authorities. The Group’s by 1.0% from 9.7% to 10.7% and decrease of target EBITDA in terminal period by 1% from 35% to 36% would not result in decrease environmental remediation provision represents management best estimate based on an independent assessment of the recoverable amount of PNHZ. of the anticipated expenditure necessary for the Group to remain in compliance with the current regulatory regime in Kazakhstan and Europe. The Group has classified this obligation as non-current except for the portion of costs, included in the annual budget for 2019. For environmental remediation provisions, actual costs can differ from estimates because of changes in laws and regulations, public expectations, discovery and analysis of site conditions and changes in clean-up technology. Movements in the provision for environmental remediation obligations are disclosed in Note 26.

196 197 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

EMPLOYEE BENEFITS 5. DISCONTINUED OPERATIONS AND ASSETS CLASSIFIED AS HELD The cost of defined long-term employee benefits payable before, on and after retirement and the present value of the obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual FOR SALE developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. The assets and liabilities, classified as discontinued operations, disposal group held for sale and assets classified as held for sale as at December 31, 2019, 2018 and 2017 and the results for 2019, 2018 and 2017 are as follows: Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. In millions of tenge December 31, 2019 Profit after income tax for 2019 Assets classified Liabilities directly Net assets directly from discontinued as held for sale associated associated TAXATION operation with the assets with the disposal In assessing tax risks, management considers to be probable obligations the known areas of tax positions which the Group would classified as held group not appeal or does not believe it could successfully appeal, if assessed by tax authorities. Such determinations inherently involve for sale significant judgment and are subject to change as a result of changes in tax laws and regulations, amendments to the taxation terms Kazakh British Technical University − − − 6 of the Group’s subsoil use contracts, the determination of expected outcomes from pending tax proceedings and current outcome JSC of ongoing compliance audits by tax authorities. The provision for tax risks other than on income tax are disclosed under provisions Other assets 7,604 − 7,604 − for taxes in Note 26. Contingent liabilities for tax risks other than on income tax are disclosed in Note 34. Provisions and contingent liabilities related to income tax are included or disclosed as income tax liabilities or contingencies (see Note 30 and 34 for further Total 7,604 − 7,604 6 details).

In millions of tenge December 31, 2018 Profit/(loss) after FAIR VALUE OF FINANCIAL INSTRUMENTS income tax for 2018 Assets classified Liabilities directly Net assets directly from discontinued as held for sale associated associated Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be operation derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs with the assets with the disposal to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required classified as held group in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes for sale in assumptions about these factors could affect the reported fair value of financial instruments presented in the consolidated KMG Retail 43,651 380 43,271 − financial statements. Further details are disclosed in Note 32. Kazakh British Technical University 15,704 4,659 11,045 (4,301) JSC USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT Other assets 2,405 − 2,405 7,754 Total 61,760 5,039 56,721 3,453 The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for prospectively as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. In millions of tenge December 31, 2017 Loss after income tax for 2017 Assets classified Liabilities directly Net assets directly from discontinued as held for sale associated associated FAIR VALUES OF ASSETS AND LIABILITIES ACQUIRED IN BUSINESS COMBINATIONS operation with the assets with the disposal The Group is required to recognize separately, at the acquisition date, the identifiable assets, liabilities and contingent liabilities classified as held group acquired or assumed in the business combination at their fair values, which involves estimates. Such estimates are based for sale on valuation techniques, which require considerable judgment in forecasting future cash flows and developing other assumptions. Kazakh British Technical University 16,803 1,925 14,878 (2,612) JSC Other assets 8,102 4 8,098 (1,054) Total 24,905 1,929 22,976 (3,666)

KMG RETAIL

On February 8, 2019 the Company completed the sale of 100% interest in KMG Retail, which was classified as a disposal group held for sale since December 31, 2018, for 60,512 million tenge.

198 199 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

At the date of loss of control net assets of KMG Retail LLP were as follow: In millions of tenge 2019 2018 (reclassed) 2017 (reclassed)1 In millions of tenge Net assets at the date of disposal Type of goods and services Property, plant and equipment 34,266 Sales of crude oil and gas* 3,966,941 4,094,011 2,677,102 Intangible assets 42 Sales of refined products* 2,043,848 2,175,909 1,422,391 Cash 2,288 Oil and gas transportation services 389,496 315,229 333,038 Other current and non-current assets 6,694 Refining of oil and oil products 195,896 175,618 129,067 43,290 Other revenue 262,675 228,197 232,165 Non-current liabilities 259 6,858,856 6,988,964 4,793,763 259 Geographical markets Net assets 43,031 Kazakhstan 1,212,267 1,131,911 944,145 Net assets 43,031 Other countries 5,646,589 5,857,053 3,849,618 The resulting gain on disposal of KMG Retail amounted to 17,481 million tenge. 6,858,856 6,988,964 4,793,763

1 In 2019 the Group decided to present sales of gas products within Sales of refined products and thus reclassed from Sales of crude oil and gas 58,026 million tenge for 2018 and 29,309 million tenge for 2017.

KBTU 7. Share in profit of joint ventures and associates, net As of December 31, 2018, KMG classified Kazakhstan-British University JSC (KBTU) as a discontinued operation. In January 2019, a sale agreement on 100% shares in KBTU, between KMG and the Public Foundation “Nursultan Nazarbayev Education Fund” came In millions of tenge 2019 2018 2017 into force. According to the terms of the agreement, the transfer of stake and its payment of 11,370 million tenge are made in three Tengizchevroil LLP 414,940 439,149 289,980 tranches within two years. On February 6, 2019 KMG lost control over KBTU. Asian Gas Pipeline LLP (AGP) 168,086 ­­— — Mangistau Investments B.V. 81,991 95,510 49,605 At the date of loss of control net assets of KBTU were as following: Caspian Pipeline Consortium 70,869 57,965 54,666 In millions of tenge Net assets at the date of disposal Beineu-Shymkent Pipeline 56,194 16,710 (668) Property and equipment 6,367 KazGerMunay LLP 17,561 27,915 17,713 Intangible assets 1,964 KazRosGas LLP 18,091 5,254 8,622

Bank deposits 2,091 Kashagan B.V. 13,114 34,034 (10,208)

Cash 4,732 Kazakhoil-Aktobe LLP 9,722 9,057 (16,788)

Other current and non-current assets 1,097 Tenizservice LLP 6,742 13,897 1,653

16,251 Kazakh-chinese pipeline JSC 3,313 ­­— — Valsera Holdings B.V. (6,107) (7,989) 9,751 Current and non-current liabilities 5,349 PetroKazakhstan Inc. (18,244) 14,590 7,233 5,349 Ural Group Limited (18,895) (18,822) (1,877) Net assets 10,902 Other joint ventures and associates 10,602 10,056 5,268 The resulting gain on disposal of KBTU amounted to 149 million tenge and the loss incurred by KBTU for the period from January 1, 827,979 697,326 414,950 2019 until the date of disposal equaled to 143 million tenge were recognized in the profit from discontinued operations.

KAZTRANSGAS TBILISI LLC

As of December 31, 2017, KazTransGas JSC (KTG), the subsidiary, had 100% legal ownership in KazTransGas Tbilisi LLC (KTG Tbilisi). On March 16, 2009 the City Court of Kutaisi disqualified KTG from exercising rights to direct the relevant activities of KTG Tbilisi. As a result, the Group lost control over KTG Tbilisi and ceased consolidating it since the date of loss of control.

On September 13, 2018, KTG and the Government of Georgia signed an arbitration agreement on the peaceful settlement of the dispute as a result of which KTG sold 100% shares of KTG Tbilisi for 40,000 thousand US dollars (equivalent to 15,110 million tenge). On September 28, 2018, KTG collected proceeds from sale of interest ownership of 40,000 thousand US dollars (equivalent to 14,473 million tenge).

Additionally, in 2018 the Group sold other subsidiaries with net assets of 252 million tenge as of disposal date for the consideration of 3,501 million tenge, which resulted in the gain of 3,249 million tenge.

6. 6. Revenue

200 201 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

8. COST OF PURCHASED OIL, GAS, PETROLEUM PRODUCTS AND OTHER 12. GENERAL AND ADMINISTRATIVE EXPENSES MATERIALS In millions of tenge 2019 2018 2017 In millions of tenge 2019 2018 2017 Payroll 78,055 73,632 77,572

Purchased oil for resale 2,448,412 2,607,706 1,445,419 Provision under Consortium case (Note 34) 34,132  

Cost of oil for refining 638,293 698,473 732,682 Consulting services 25,448 22,435 19,523

Purchased gas for resale 493,280 356,932 242,987 Accrual/(reversal) of impairment of VAT receivable 15,703 4,215 (24,158)

Materials and supplies 217,138 182,067 147,484 Accrual/(reversal) of expected credit losses for other current assets (Note 12,246 1,225 (120) Purchased petroleum products for resale 116,621 467,780 160,942 21) Social payments 8,933 24,095 28,024 3,913,744 4,312,958 2,729,514 VAT that could not be offset 6,910 3,031 7,923

Rent of property, plant and equipment and intangible assets 2,309 5,750 5,780

Accrual/(reversal) of expected credit losses for trade receivables (Note 21) 1,892 (1,489) 1,056 9. PRODUCTION EXPENSES Charitable donations and sponsorship 381 1,699 1,225

In millions of tenge 2019 2018 (reclassed) 2017 (reclassed) (Reversal of) /allowance for impairment of long term advances (11)  1,188

Payroll 338,120 291,693 311,973 (Reversal of) /allowance for obsolete inventories (80) 4,339 345 1 Repair and maintenance 129,450 98,424 86,570 (Reversal of) /allowance for fines, penalties and tax provisions (19,755) 29,836 (4,212)

Energy 88,910 71,914 63,082 Other 47,804 44,717 49,634

Transportation costs 30,456 21,988 15,685 213,967 213,485 163,780 Lease expenses* 52,091 10,085 8,293

Others 82,666 110,371 138,743 The total payroll amounted to 428,717 million tenge (2018: 381,505 million tenge, 2017: 405,648 million tenge) and included in Production expenses, transportation and selling expenses and general and administrative expenses in the consolidated statement of profit or loss. 721,693 604,475 624,346

1. The Group reclassed outsourced repair and maintenance amounts from Others for 2018 and 2017 for 56,527 million tenge and 43,912 million tenge, respectively. Additionally, Lease expenses were presented separately and excluded from Others for 2017 and 2018 13. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE

10. TAXES OTHER THAN INCOME TAX ASSETS, EXPLORATION AND EVALUATION ASSETS

In millions of tenge 2019 2018 2017 In millions of tenge 2019 2018 2017 Property, plant and equipment (Note 15) 144,482 33,603 22,328 Rent tax on crude oil export 133,144 145,523 83,183 Exploration and evaluation assets (Note 16) 57,239 107,745 814 Export customs duty 131,326 131,128 105,302 Investment property (142) 1,538 1,518 Mineral extraction tax 100,300 115,968 93,569 Intangible assets (Note 17) 6,240 22,636 — Other taxes 89,525 85,113 72,393 207,819 165,522 24,660 454,295 477,732 354,447

11. TRANSPORTATION AND SELLING EXPENSES

In millions of tenge 2019 2018 2017 Transportation 374,686 317,402 189,949

Payroll 12,542 16,180 16,103

Other 33,174 37,195 32,011

420,402 370,777 238,063

202 203 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

FOR THE FOLLOWING CGUS IMPAIRMENT LOSSES WERE RECOGNISED FOR YEARS ENDED: The recoverable amount of Satti rig was determined on the basis of value-in-use method. Value-in-use was assessed as the present value of the future cash flows expected to be derived from the rig. The forecasted cash flows were based on financial budget

approved by the Group management for the period of 2020-2024, and on estimated forecasts for the period of the useful life In millions of tenge 2019 2018 2017 of the rig till 2041 extrapolated by inflation rates and discounted at 12.5%. As a result of the impairment test, the Group recognised an impairment loss of 24,505 million tenge as at December 31, 2019. CGUs of KMG International (KMGI) 93,587 43,702 —

Pearls project 38,180 — — CGU BNT Drilling jackup rig "Satti" (Satti rig) 24,505 — — For the year ended December 31, 2019, the Group recognized an impairment loss of 12,583 million tenge. CGU Batumi Oil Terminal (BNT) 12,583 4,136 —

Self-propelled barges “Sunkar” and “Berkut" (Barges) 11,837 2,659 — Barges Write-off of brownfields of KMG EP 18,888 — — The recoverable amount of the barges were determined on the basis of value-in-use method. Value-in-use was assessed N project — 67,897 — as the present value of the future cash flows expected to be derived from the barges until the end of the barges contract Satpayev project — 34,539 — in 2021 at the discount rate of 10.05%. Due to the fact that the prolongation of the contracts was remote, the Group recognized Write-off of construction in progress of PNHZ — — 15,277 an impairment loss of 11,837 million tenge for the year ended December 31, 2019.

Others 8,239 12,589 9,383 Write of the brownfields of KMG EP 207,819 165,522 24,660 For year ended December 31, 2019, the Group wrote-off exploration and evaluation assets of 18,888 million tenge related to several CGUs of KMGI KMG EP subsoil use contracts that were terminated with relinquishment of contract territories to the Government.

As of December 31, 2019, 2018 and 2017 KMGI performed impairment tests of its CGUs, Petrochemical, Bulgaria, Refining and Other. Satpayev and N projects The Group considered forecasted refinery margins and production volumes, among other factors, when reviewing for indicators of impairment. As at December 31, 2018, the Group recognized impairment loss for exploration and evaluation assets related to the Satpayev and N projects for 34,539 million tenge and 67,897 million tenge, respectively. These impairments occurred due to the withdrawal In 2017, 2018 and 2019, the recoverable amount of the CGUs were determined based on fair value less costs of disposal (FVLC), which from the projects and decisions to relinquish the contract territories to the Government by the Group and the partners is the present value of the free cash flows adjusted by the present value of the residual value. The key assumptions used in the fair of the projects’. The Group did not write-off the projects’ assets due to the fact that the contract areas had not been returned value less costs to sell calculations for the above-mentioned CGUs were operating profit, discount rates and growth rate used to the Government as of December 31, 2018. to extrapolate cash flows beyond the budget period. On April 24, 2019, the Group received Satpayev subsoil use contract termination notice from the Government, accordingly the Group The discount rate applied to cash flow projections for Refining and Petrochemical CGUs was at 9.6% (2018: 9.7%, 2017: 9.0%) relinquished the contract area fully and wrote-off exploration and evaluation assets related to the project. and cash flows beyond the 5-year period were extrapolated using 1.9% growth rate that is the same as the long-term average growth rate for the industry. The capitalization rate used for residual values is 7.7% (2018: 7.8%, 2017: 7.5%). Write of construction of progress of PNHZ

As to Bulgaria CGU, the discount rate applied to cash flow projections was at 9.6% (2018: 9.8 %, 2017: 9.1%) and cash flows In 2017, the Group wrote-off construction in progress that became idle due to change in configuration of Pavlodar Refinery beyond the 5-year period were extrapolated using growth rate of 1.9% that is the same as the long-term average growth rate modernization project. for the industry. The capitalization rate used for residual values is 7.6% (2018: 7.9%, 2017: 7.6%).

In 2018, the recoverable values of the CGUs Refining, Petrochemical, Bulgaria and Other were below their book values. As at December 31, 2018 based on the results of analysis performed, KMGI recognized impairment loss of property, plant and equipment and intangible assets of 21,195 million tenge and 22,507 million tenge, respectively.

In 2019, the recoverable values of the CGUs exceeded their respective carrying values, except for Refining CGU. For the purposes of impairment test, KMGI updated projected cash flows to reflect the decrease in forecasted refinery margins and change in post-tax discount rate. As at December 31, 2019 based on the results of the test performed, KMGI recognized impairment loss of property, plant and equipment and intangible assets of 86,946 million tenge and 6,641 million tenge, respectively.

Sensitivity to changes in assumptions:

With regard to the assessment of the FVLC for the CGUs, the Group believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of the unit to materially exceed its recoverable amount, other than for CGU Refinery, for which the breakeven point for the current model is achieved under a decrease of 3.3% of operating profit.

Pearls project

Exploration stage of Pearls project expired on December 14, 2019. To proceed to the next stage, the Development plan was due to be submitted by the partners of the project. However, the partners of the Pearls project decided not to proceed with the Development plan, and agreed to relinquish the contract area under the Pearls PSA to the Government voluntarily, as a result, as at December 31, 2019, the Group recognized impairment loss for 38,180 million tenge. As of December 31, 2019 the Group did not write-off the project’s assets due to the fact that the contract area has not been returned to the Government yet.

Satti rig

204 205 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

14. FINANCE INCOME / FINANCE COST 15. PROPERTY, PLANT AND EQUIPMENT

FINANCE INCOME In millions of tenge Oil and gas Pipelines Refinery Buildings Machinery Vehicles Other Capital Total assets assets and improve- and equip- work In millions of tenge 2019 2018 2017 ments ment in prog- ress Interest income on bank deposits, financial assets, loans and bonds 99,274 100,097 119,061

Amortization of discount on issued financial guarantees 1,974 1,861 1,541 Net book value 913,553 682,348 844,277 291,311 317,213 70,860 42,428 538,210 3,700,200 as at December 31, 2016 Total interest income 101,248 101,958 120,602 Foreign currency (2,514) (140) (1,936) (660) 264 (109) 175 (442) (5,362) Derecognition of loan (Note 25) 111,476 53,263 – translation Write-off of guarantee due to significant modification 13,573 – – Change in estimate 248 (200) – (5) – – – – 43

Other 14,583 5,806 1,972 Additions 27,268 17,102 19,859 8,134 6,466 8,144 2,912 539,998 629,883 240,880 161,027 122,574 Disposals (17,372) (1,154) (2,647) (5,617) (4,286) (2,832) (7,143) (1,459) (42,510) Depreciation charge (62,018) (25,537) (72,919) (19,440) (32,307) (8,307) (7,467) – (227,995)

Finance costs Accumulated depreciation 14,881 859 2,517 4,973 3,617 2,482 6,867 760 36,956 In millions of tenge 2019 2018 2017 and impairment on disposals Impairment, net (Note 13) – (1) – (1,439) (1,431) (1,908) (947) (16,602) (22,328) Interest on loans and debt securities issued (Note 25) 225,093 250,055 217,246 Transfers (to)/from (2) (52) 13,087 1 34 – 1 166 13,235 Interest under oil supply agreement (Note 27) 19,541 35,868 26,473 inventory, net Total interest expense 244,634 285,923 243,719 Transfer to assets held (170) – (3,908) (3,553) (242) (124) (98) - (8,095) for sale, net Issued financial guarantees 11,341 2,324 160 Transfers to investment – – – (251) (13) – (1) (355) (620) property Unwinding of discount on asset retirement obligations and provision 13,819 11,523 9,941 for environmental obligation Transfers (to)/from (211) – – – (306) – 2 (1,608) (2,123) intangible assets, net Bonds redemption fee (Note 25) – 89,612 – (Note 17) Discount on assets with non-market interest rate 1,705 915 6,155 Transfer from exploration 8,881 – – – – – – – 8,881 and evaluation assets Impairment of bank deposits and current accounts 1,034 806 18,610 (Note 16) Other 44,900 36,552 27,770 Transfers 82,278 104,461 194,363 16,688 100,818 5,829 6,032 (510,469) – 317,433 427,655 306,355 and reclassifications Net book value 964,822 777,686 992,693 290,142 389,827 74,035 42,761 548,199 4,080,165 as at December 31, 2017 On May 4 and 11, 2018, the Company made early redemption of Eurobonds for 3,463 million US dollars (equivalent to 1,143,982 million tenge at payment dates), including interest. In order to make these early redemptions, in 2018, the Company recognized fee Foreign currency 90,854 5,661 76,744 11,115 6,037 5,129 1,893 2,975 200,408 translation for the early redemption of 89,612 million tenge (Note 25). Change in estimate (2,105) 7,677 – (5) – – – – 5,567

Additions 24,267 5,285 22,149 1,273 9,482 12,958 4,596 497,659 577,669

Disposals (17,128) (3,442) (1,909) (6,913) (5,329) (3,183) (4,463) (2,407) (44,774)

Depreciation charge (73,553) (28,114) (98,975) (20,840) (36,372) (10,603) (8,750) – (277,207)

Accumulated depreciation 12,602 3,009 1,905 4,155 4,444 2,985 3,596 569 33,265 and impairment on disposals Impairment, net (Note 13) (3,651) (3) – (11,557) (11,710) (2,853) (851) (2,978) (33,603)

Transfers (to)/from 45 (101) 4,145 (4) 177 25 (11) 3,015 7,291 inventory, net Transfer to assets held (9,847) (2) (354) (20,348) (1,846) (192) (1,492) (1,509) (35,590) for sale, net Transfers from/(to) – – – 354 – – – (176) 178 investment property Transfers (to)/from (97) – – – – – 1 (1,703) (1,799) intangible assets, net (Note 17) Transfer from exploration 3,113 – – – – – – 487 3,600 and evaluation assets (Note 16)

206 207 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Additions

In millions of tenge Oil and gas Pipelines Refinery Buildings Machinery Vehicles Other Capital Total In 2019 additions are mainly attributable to development drilling at Ozenmunaigas, Embamunaigas and Karachaganak for 181,050 assets assets and improve- and equip- work million tenge, the construction of compressor stations at KTG for 67,998 million tenge within the framework of modernization of gas ments ment in prog- transportation system, the reconstruction of the water pipeline Astrakhan-Mangyshlak and the reconstruction of the Uzen-Atyrau- ress Samara oil pipeline for 35,323 million tenge at KTO, overhaul at the Atyrau refinery for 36,972 million tenge and Rompetrol Rafinare for 31,859 million of tenge. Transfers 92,354 20,157 554,806 15,832 39,892 38,260 6,844 (768,145) – and reclassifications Transfer to assets held for sale Net book value 1,081,676 787,813 1,551,204 263,204 394,602 116,561 44,124 275,986 4,515,170 as at December 31, 2018 During the year ended December 31, 2019, the Group classified gas compressor station and barges with net book value of 35,621 Change in accounting – – (524) – – – – – (524) policy (Note 3) million tenge as assets held for sale. As at January 1, 2019 1,081,676 787,813 1,550,680 263,204 394,602 116,561 44,124 275,986 4,514,646 Other Foreign currency (2,749) (173) (1,115) (306) 374 (314) (50) − translation For the year ended December 31, 2019, the Group capitalized in the carrying amount of property, plant and equipment borrowing Additions 48,725 6,370 794 10,615 11,190 5,076 6,400 345,236 434,406 costs of 2,525 million tenge at the average interest rate of 4.3% related to the construction of new assets (for the year ended December 31, 2018: 21,715 million tenge at the weighted average interest rate of 2.75% and for the year ended December 31, 2017: Change in estimate 13,006 12,156 ­— 27 — — 19 — 25,208 26,532, million tenge at the weighted average interest rate of 3.36%). Disposals (24,598) (2,161) (4,100) (15,970) (7,534) (3,455) (7,200) (1,088) (66,106)

Depreciation charge (85,565) (28,859) (121,306) (17,969) (37,832) (11,608) (10,601) − (313,740) As at December 31, 2019 the cost of fully depreciated but still in use property, plant and equipment was 394,841 million tenge (as at December 31, 2018: 334,533 million tenge and as at December 31, 2017: 290,360 million tenge). Accumulated depreciation 14,198 1,794 4,039 11,148 7,085 3,141 6,733 325 48,463 and impairment on disposals As at December 31, 2019, property, plant and equipment with the net book value of 1,023,146 million tenge (as at December 31, Impairment/ (reversal (4,911) 228 (86,946) (5,277) (31,068) (13,140) (1,057) (2,311) (144,482) 2018: 1,108,420 million tenge and as at December 31, 2017: 940,437 million tenge) were pledged as collateral to secure borrowings impairment) (Note 13) and payables of the Group. Transfers (to)/from assets 18 − (81) (10,610) (18,390) (6,493) (65) − (35,621) classified as held Capital commitments disclosed in Note 34 for sale (Note 5)

Transfers from /(to) 215 − − 16,314 144 − 2,356 (39) 18,990 investment property 16. EXPLORATION AND EVALUATION ASSETS Transfers (to)/from 35 (35) 4,435 1 362 13 666 3,295 8,772 inventory, net In millions of tenge Tangible Intangible Total Transfers 1,734 − − − − − − 1,024 2,767 from exploration Net book value as at December 31, 2016 193,835 37,719 231,554 and evaluation assets Foreign currency translation (95) (53) (148) (Note 16) Additions 33,075 345 33,420 Transfers (to)/from (145) − (64) − − − 97 (4,587) (4,699) intangible assets (Note Change in estimate (113) – (113) 17) Disposals (105) (557) (662) Transfers 8,115 26,584 35,325 49,478 138,878 7,856 64,864 (331,100) − and reclassifications Impairment (Note 13) (803) (11) (814)

Net book value (10,610) (18,390) (6,493) (65) − 106,286 286,741 4,484,271 Transfers to discontinued operations and assets held for sale, net – (1,030) (1,030) as at December 31, 2019 Transfer to property, plant and equipment (Note 15) (8,881) – (8,881) At cost (35,621) 1,028,456 2,408,000 568,723 841,626 226,215 222,426 336,772 7,665,190 Transfers and reclassifications (1,260) 1,260 – Accumulated depreciation 215 − (4,699) (268,068) (383,815) (128,578) (116,140) (50,031) (3,180,919) and impairment Net book value as at December 31, 2017 215,653 37,673 253,326 Net book value 1,049,763 803,717 1,381,661 300,655 457,811 97,637 106,286 286,741 4,484,271 Foreign currency translation 1,373 699 2,072 as at December 31, 2019 Additions 46,008 180 46,188 At cost 2,154,422 985,787 2,381,309 526,180 720,221 234,740 121,458 324,851 7,448,968 Change in estimate 25 – 25 Accumulated depreciation (1,072,746) (197,974) (830,105) (262,976) (325,619) (118,179) (77,334) (48,865) (2,933,798) and impairment Disposals (1,314) (5) (1,319) Net book value 1,081,676 787,813 1,551,204 263,204 394,602 116,561 44,124 275,986 4,515,170 Accumulated impairment on disposals 957 5 962 as at December 31, 2018 Impairment (Note 13) (96,180) (11,565) (107,745) At cost 1,933,302 948,285 1,647,460 522,194 665,120 179,515 111,072 599,853 6,606,801 Transfer to assets held for sale (102) – (102) Accumulated depreciation (968,480) (170,599) (654,767) (232,052) (275,293) (105,480) (68,311) (51,654) (2,526,636) and impairment Transfers to inventory (7) – (7) Net book value 964,822 777,686 992,693 290,142 389,827 74,035 42,761 548,199 4,080,165 Transfer to property, plant and equipment (Note 15) (3,600) – (3,600) as at December 31, 2017

208 209 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Tangible Intangible Total Additions – – 2,266 4,096 6,362 Net book value as at December 31, 2018 162,813 26,987 189,800 Disposals – – (3,290) (542) (3,832) Additions 51,385 3,144 54,529 Amortization charge – 1,659 (6,538) (2,503) (7,382)

Change in estimate 9 – 9 Accumulated amortization and impairment – – 3,286 540 3,826 on disposals Disposals (Note 13) (35,150) (1,160) (36,310) Impairment (Note 13) – (22,506) (59) (71) (22,636) Accumulated impairment on disposals 33,159 507 33,666 Transfers to assets held for sale – – (42) (88) (130) Impairment (Note 13) (51,717) (5,522) (57,239) Transfer (to)/from property, plant – – 1,822 (23) 1,799 Transfer to intangible assets (Note 17) – (1,800) (1,800) and equipment, net (Note 15)

Transfers to inventory 9 – 9 Transfers and reclassifications – (362) 1,717 (1,355) –

Transfer to property, plant and equipment (Note 15) (2,767) – (2,767) Net book value as at December 31, 2018 100,054 33,364 13,429 26,230 173,077

Transfers and reclassifications (5,449) 5,449 – Foreign currency translation (1,493) 2,237 (62) (461) 221

Net book value as at December 31, 2019 152,292 27,605 179,897 Additions – – 5,827 4,599 10,426 Disposals – – (3,725) (1,678) (5,403)

As at December 31, 2019, 2018 and 2017 the exploration and evaluation assets are represented by the following projects: Change in estimation – – – (174) (174) Amortization charge – – (5,709) (5,608) (11,317) In millions of tenge 2019 2018 2017 Accumulated amortization and impairment Zhambyl 58,293 50,178 33,396 on disposals – – 3,551 527 4,078 Embamunaigas 41,337 20,022 19,078 (Impairment)/ reversal, net (Note 13) – (6,641) 5 396 (6,240) Urikhtau 35,265 30,469 27,590 Transfers from inventory – – – 5 5 KTG projects 13,206 11,840 12,051 Transfers from exploration and evaluation assets (Note 16) – – – 1,800 1,800 Pearls – 36,486 35,069 Transfer (to)/from property, plant Project N – – 66,258 and equipment, net (Note 15) – – 4,838 (139) 4,699 Satpayev – – 33,791 Transfers and reclassifications – – 1,300 (1,300) – Others 31,796 40,805 26,093 Net book value as at December 31, 2019 98,561 28,960 19,454 24,197 171,172 179,897 189,800 253,326 At cost 209,009 57,921 70,381 93,290 430,601

Additions Accumulated amortization and impairment (110,448) (28,961) (50,927) (69,093) (259,429) Net book value as at December 31, 2019 98,561 28,960 19,454 24,197 171,172 During 2019, the Group capitalized exploration, evaluation, geological and geophysical exploration expenses mainly attributable At cost 169,139 58,164 62,322 81,195 370,820 to Embamunaigas subsoil use contracts in the amount of 32,154 million tenge and 12,135 million tenge attributable to Zhambyl and other new subsoil use contracts of the Company. Accumulated amortization and impairment (69,085) (24,800) (48,893) (54,965) (197,743) Net book value as at December 31, 2018 100,054 33,364 13,429 26,230 173,077 17. INTANGIBLE ASSETS At cost 167,782 50,312 57,238 71,162 346,494 Accumulated amortization and impairment (69,085) (1,249) (43,557) (47,398) (161,289) In millions of tenge Goodwill Marketing Software Other Total Net book value as at December 31, 2017 98,697 49,063 13,681 23,764 185,205 related intangible assets Carrying amount of goodwill is allocated to each of the group of cash-generating units as follows: Net book value as at December 31, 2016 98,722 50,458 14,772 23,596 187,548

Foreign currency translation (25) (169) (72) 114 (152) Cash-generating unit 2019 2018 2017

Additions – – 2,452 2,885 5,337 Downstream Romania 1,140 1,145 990

Disposals – – (1,003) (2,416) (3,419) Other 8,868 8,905 7,703

Amortization charge – (1,226) (5,517) (2,682) (9,425) Cash-generating units of KMGI 10,008 10,050 8,693 Accumulated amortization and impairment Cash-generating units of PNHZ 88,553 88,553 88,553 on disposals – – 526 2,401 2,927 Other – 1,451 1,451 Transfer from property, plant and equipment, net (Note 15) – – 1,304 819 2,123 Total goodwill 98,561 100,054 98,697

Transfers (to)/from inventory, net – – – 266 266

Transfers and reclassifications – – 1,219 (1,219) – In 2019, 2018 and 2017, based on the impairment test results, no impairment of PNHZ and other goodwill was recognized. For the detailed discussion of goodwill impairment test refer to Note 4. Net book value as at December 31, 2017 98,697 49,063 13,681 23,764 185,205 Foreign currency translation 1,357 5,510 586 2,412 9,865

210 211 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions December 31, 2019 December 31, 2018 December 31, 2017 18. BANK DEPOSITS of tenge Main activity Place Carrying Percentage Carrying Percentage Carrying Percentage of business value ownership value ownership value ownership In millions of tenge 2019 2018 2017 Denominated in US dollar 390,598 414,578 1,656,763 KazGerMunay Oil and gas exploration Kazakhstan 25,620 50.00% 38,349 50.00% 47,537 50.00% LLP and production Denominated in tenge 21,940 22,031 28,228 Kazakhoil- Production of crude oil Kazakhstan 21,438 50.00% 25,773 50.00% 22,716 50.00% Denominated in other currency – 2,707 2,473 Aktobe LLP Less: allowance for expected credit losses (508) (560) – Teniz Services Design, construction Kazakhstan 19,277 48.996% 16,945 48.996% 6,134 48.996% 412,030 438,756 1,687,464 LLP and operation of infrastructure facilities, support of offshore oil As at December 31, 2019, the weighted average interest rate for long-term bank deposits was 1.08% in US dollars and 2.58% operations in tenge, respectively (2018: 1.05% in US dollars and 3.73% in tenge, respectively and 2017: 1.07% in US dollars and 2.29% in tenge, Valsera Holding Oil refining Kazakhstan 12,776 50.00% 23,790 50.00% 36,737 50.00% respectively). BV Other 41,014 28,258 22,649 As at December 31, 2019, the weighted average interest rate for short-term bank deposits was 1.57% in US dollars, 8.33% in tenge, respectively (2018: 2.40% in US dollars, 8.20% in tenge and 0.06% in other foreign currencies, respectively and 2017: 1.65% in US Associates dollars, 7.51% in tenge and 0.65% in other foreign currencies, respectively). Caspian Pipeline Transportation of liquid Kazakhstan 359,173 20.75% 289,586 20.75% 195,095 20.75% Consortium hydrocarbons / Russia (CPC) In millions of tenge 2019 2018 2017 PetroKazakhstan Exploration, production Kazakhstan 95,320 33.00% 116,577 33.00% 115,920 33.00% Maturities under 1 year 359,504 386,459 1,638,941 Inc. (PKI) and processing of oil and gas Maturities between 1 and 2 years 1,029 155 836 Other 24,534 23,062 14,989 Maturities over 2 years 51,497 52,142 47,687 5,590,384 4,895,444 3,823,630 412,030 438,756 1,687,464

As at December 31, 2019 bank deposits include cash pledged as collateral of 50,046 million tenge (2018: 51,538 million tenge and 2017: 62,731 million tenge), which are represented mainly by 37,916 million tenge (2018: 37,729 million tenge and 2017: 32,100 million tenge) at restricted bank accounts designated as a liquidation fund per requirements of subsoil use contracts. All of the above joint ventures and associates are strategic for the Group’s business.

As at December 31, 2019, the Group’s share in unrecognized losses of joint ventures and associates was equal to 17,812 million tenge (2018: 77,440 million tenge and 2017: 175,623 million tenge). The Group’s change in share of unrecognized losses of joint ventures 19. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES and associates in 2019 was 59,628 million tenge (2018: 98,182 million tenge and 2017: 182,191 million tenge).

The following table summarizes the movements in the investments in 2019, 2018 and 2017: In millions December 31, 2019 December 31, 2018 December 31, 2017 of tenge Main activity Place Carrying Percentage Carrying Percentage Carrying Percentage In millions of tenge 2019 2018 2017 of business value ownership value ownership value ownership At January 1 4,895,444 3,823,630 3,718,920 Effect of adoption of IFRS 9 as at January 1, 2018 – (3,237) – Joint ventures Share in profits of joint ventures and associates, net (Note 7) 827,979 697,326 414,950 Tengizchevroil Oil and gas exploration Kazakhstan 2,377,207 20.00% 1,970,533 20.00% 1,353,084 20.00% Other changes in the equity of the joint venture (3,803) 494 10,630 LLP and production Acquisition, net – 3,084 3 Kashagan B.V. Oil and gas exploration Kazakhstan 2,057,795 50.00% 2,053,621 50.00% 1,743,495 50.00% and production Guarantees issued 11,162 – – Asia Gas Pipeline Construction 168,086 50.00% – 50.00% – 50.00% Dividends received (126,461) (159,988) (271,783) LLP and operation of the gas pipeline Change in dividends receivable 7,433 3,702 (39,889) Mangistau Oil and gas development Kazakhstan 158,867 50.00% 138,549 50.00% 135,781 50.00% Contribution without change in ownership 5,889 1,467 – Investments B.V. and production Refund of contribution without change in ownership – (93,072) (1,715) Beineu- Construction Kazakhstan 101,766 50.00% 34,411 50.00% 17,701 50.00% Eliminations and adjustments1 (7,043) 17,071 (20,722) Shymkent and operation of the gas Pipeline LLP pipeline Reversal of impairment of investments – – 14,845 KazRosGas LLP Processing Kazakhstan 79,849 50.00% 65,116 50.00% 33,761 50.00% Transfers to assets classified as held for sale – (67) and sale of natural gas – and refined gas products Foreign currency translation (20,216) 604,967 (1,542) Ural Group Oil and gas exploration Kazakhstan 47,662 50.00% 70,874 50.00% 78,031 50.00% At December 31 5,590,384 4,895,444 3,823,630 Limited BVI and production 1. Equity method eliminations and adjustments of unrealized income from sale of inventory from a JV to a subsidiary and capitalized borrowing costs of the loans provided by the Company and subsidiaries to JVs.

212 213 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

On October 16, 2015, the Group sold 50% of its shares in KMG Kashagan B.V. to Samruk-Kazyna with a right to buy back all or part The following tables illustrate summarized financial information of material joint ventures, based on financial statements of these entities of the shares effective from January 1, 2018 to December 31, 2020 (further “Option”). On December 20, 2017, the exercise period for 2019: for the call option was changed to January 1, 2020 and December 31, 2022. As of December 31, 2019, 2018 and 2017, the price of the option was insignificant. In millions of tenge Ural Group Limited BVI KazGerMunay LLP Kazakhoil-Aktobe TenizService LLP Valsera LLP Holding BV The Amsterdam Court imposed certain restrictions on 50% of shares in Kashagan B.V. owned by Samruk-Kazyna (further Non-current assets 218,689 118,312 53,020 335,845 564,128 restrictions). During the restriction period, these shares of Kashagan B.V. cannot be sold, transferred or pledged. As of December 31, Current assets, 729 42,245 19,326 51,621 80,995 2019 the restrictions remained in force and control over the asset was not transferred to the Group. including Cash and cash 714 37,401 11,947 6,953 41,660 In 2018, refund of contribution without change in ownership mainly relates to the partial withdrawal of investments in MIBV of 249 equivalents million US dollars (equivalent to 92,582 million tenge). Non-current liabilities, (123,902) (40,343) (6,533) (117,580) (513,735) including The following tables illustrate summarized financial information of material joint ventures, based on financial statements of these entities Non-current financial (94,532) – – – (507,803) for 2019: liabilities Current liabilities, (192) (68,975) (22,937) (230,542) (90,320) In millions of tenge Tengizchevroil LLP KMG Asia Gas Pipeline Mangistau Beineu-Shymkent KazRosGas including Kashagan B.V. LLP Investments B.V. Pipeline LLP LLP Current financial – – – (1,360) (27,035) Non-current assets 16,276,182 4,087,310 1,395,615 433,950 482,553 10,176 liabilities Current assets, 975,247 273,048 578,072 114,571 171,411 195,666 Equity 95,324 5 1 , 2 3 9 42,876 39,344 41,068 including Share of ownership 50% 50% 50% 48.996% 50% Cash and cash 45,128 74,330 136,318 16,091 11,918 83,674 Consolidation – – – – ( 7 , 7 5 8 ) equivalents adjustments Non-current liabilities, (4,137,239) (499,989) (1,225,064) (148,898) (354,711) (148) Carrying amount 4 7 , 6 6 2 25,620 2 1 , 4 3 8 1 9 , 2 7 7 1 2 , 7 7 6 including of the investments Non-current financial (2,563,353) (581) (1,050,532) (49,553) (342,836) – as at December 31, liabilities 2019 Current liabilities, (1,228,155) (201,781) (412,451) (80,495) (145,277) (45,996) Revenue – 191,297 61,597 257,944 132,246 including Depreciation, depletion (13) (50,605) (11,886) (194,344) (25,790) Current financial (44,762) (194) (379,633) (400) (119,557) – and amortization liabilities Finance income – 227 185 3 21 Equity 11,886,035 3,658,588 336,172 319,128 153,976 159,698 Finance costs (27,471) (1,348) (91) (25,434) (34,425) Share of ownership 20% 50% 50% 50% 50% 50% Income tax expense (1,688) (73,148) 113 – (22,964) Goodwill – 228,501 – – – – Profit/(loss) (37,790) 35,121 19,445 13,760 (12,214) Consolidation – – – (697) 24,778 – for the year adjustments from continuing operations Carrying amount 2,377,207 2,057,795 168,086 158,867 101,766 79,849 of the investments Other comprehensive (627) (216) – – (85) as at December 31, (loss)/income 2019 Total comprehensive (38,417) 34,905 19,445 13,760 (12,299) Revenue 6,231,720 443,545 785,250 836,474 172,894 306,259 income/(loss) Depreciation, depletion (874,694) (175,119) (74,734) (70,250) (16,028) (280) Change in unrecognized – – – – – and amortization share of losses Finance income 9,428 5,377 9,674 159 – 2,384 Dividends received – 30,183 9,057 4,410 757 Finance costs (39,896) (41,813) (90,669) (8,772) (26,563) – Income tax expense (889,194) (57,794) (113,177) (51,818) – (8,625) The following tables illustrate summarized financial information of material joint ventures, based on financial statements of these entities Profit for the year 2,074,701 26,228 428,204 165,766 112,387 30,311 for 2018: from continuing operations In millions of tenge Tengizchevroil KMG Asia Gas Pipeline Mangistau Beineu-Shymkent KazRosGas Other comprehensive (41,327) (17,880) – 485 – (846) (loss)/income LLP Kashagan B.V. LLP Investments B.V. Pipeline LLP LLP Non-current assets 12,922,783 4,156,425 1,460,389 407,888 441,704 11,563 Total comprehensive 2,033,374 8,348 428,204 166,251 112,387 29,465 income Current assets, including 1,057,016 382,203 548,679 72,748 198,892 141,406 Change in unrecognized – – 46,016 – – – Cash and cash equivalents 203,864 111,112 14,907 15,318 139,385 19,910 share of losses Non-current liabilities, (2,780,571) (705,486) (1,710,805) (125,106) (496,648) (133) Dividends received – – – 61,872 – – including Non-current financial (1,536,800) (778) (1,642,324) (49,946) (487,373) – liabilities

214 215 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Tengizchevroil KMG Asia Gas Pipeline Mangistau Beineu-Shymkent KazRosGas In millions of tenge Ural Group Limited BVI KazGerMunay LLP Kazakhoil-Aktobe TenizService LLP Valsera LLP Kashagan B.V. LLP Investments B.V. Pipeline LLP LLP LLP Holding BV Current liabilities, including (1,346,563) (184,826) (390,294) (77,576) (104,498) (22,604) Income tax expense (1,788) (95,496) (21,360) (1,249) 8,630 Current financial liabilities (36,670) (194) (363,250) (451) (93,024) – Profit/(loss) for the year (37,645) 55,829 18,114 28,363 (15,978) from continuing operations Equity 9,852,665 3,648,316 (92,031) 277,954 39,450 130,232 Other comprehensive (loss)/ 22,023 4,809 – – – Share of ownership 20% 50% 50% 50% 50% 50% income Accumulated unrecognized – – 46,016 – – – Total comprehensive income/ (15,622) 60,638 18,114 28,363 (15,978) share of losses (loss) Goodwill – 229,463 – – – – Change in unrecognized share – – – – – Consolidation adjustments – – – (428) 14,686 – of losses Carrying amount 1,970,533 2,053,621 – 138,549 34,411 65,116 Dividends received – 42,706 6,000 2,597 1,306 of the investments as at December 31, 2018 Revenue 5,941,474 438,662 766,661 839,356 150,793 244,346 The following tables illustrate summarized financial information of material joint ventures, based on financial statements of these entities Depreciation, depletion (685,434) (180,246) (83,523) (60,373) (15,540) (134) for 2017: and amortization Finance income 19,426 2,954 7,480 857 303 1,255 In millions of tenge Tengizchevroil KMG Asia Gas Pipeline Mangistau Beineu-Shymkent KazRosGas LLP Kashagan B.V. LLP Investments B.V. Pipeline LLP LLP Finance costs (136,761) (42,366) (100,922) (8,006) (28,277) (377) Non-current assets 8,719,902 3,784,723 1,572,551 393,189 442,257 27,019 Income tax expense (941,034) (38,996) – (56,904) – (13,163) Current assets, including 1,527,677 172,993 519,333 66,799 139,272 150,968 Profitfor 2,195,746 68,067 211,332 193,707 33,420 10,509 the year from continuing Cash and cash 748,523 49,410 9,070 3,090 71,939 30,877 operations equivalents Other comprehensive (loss)/ 1,270,679 552,184 – (319) – 17,231 Non-current liabilities, (2,507,496) (563,263) (2,058,444) (66,129) (464,527) – income including Total comprehensive 3,466,425 620,251 211,332 193,388 33,420 27,740 Non-current financial (1,329,320) – (2,015,735) – (457,760) – income liabilities Change in unrecognized – – 105,666 – – – Current liabilities, (974,662) (304,431) (331,506) (122,297) (110,972) (69,021) share of losses including Dividends received 64,671 – – – – 14,181 Current financial (31,719) (272,148) (297,654) – (91,095) – liabilities Equity 6,765,421 3,090,022 (298,066) 271,562 6,030 108,966 The following tables illustrate summarized financial information of material joint ventures, based on financial statements of these entities Share of ownership 20% 50% 50% 50% 50% 50% for 2018: Goodwill – 198,484 – – – – In millions of tenge Ural Group Limited BVI KazGerMunay LLP Kazakhoil-Aktobe TenizService LLP Valsera Accumulated – – 149,033 – – – LLP Holding BV unrecognized share of losses Non-current assets 239,908 131,604 58,965 520,242 610,463 Consolidation – – – – 14,686 (20,722) Current assets, including 216 75,131 19,332 53,449 56,343 adjustments Cash and cash equivalents 183 64,921 5,526 792 25,283 Carrying amount 1,353,084 1,743,495 – 135,781 17,701 33,761 of the investments Non-current liabilities, including (98,145) (43,798) (10,744) (299,007) (482,303) as at December 31, 2017 Revenue 4,357,947 183,119 587,429 635,903 79,097 243,527 Non-current financial liabilities (73,500) – – (3,836) (481,398) Depreciation, depletion (560,817) (90,258) (64,333) (62,190) (13,235) (638) Current liabilities, including (231) (86,239) (16,007) (240,100) (129,621) and amortization Current financial liabilities – – – (3,847) (27,818) Finance income 22,007 1,025 3,757 126 21 2,489 Equity 141,748 76,698 51,546 34,584 54,882 Finance costs (127,134) (36,557) (86,077) (5,788) (24,649) (13,362) Share of ownership 50% 50% 50% 48.996% 50% Income tax expense (621,385) (3,750) (89,287) (34,036) – (11,907) Consolidation adjustments – – – – (3,651) Profit/(loss) for the year 1,449,898 (20,417) 269,647 99,210 38,485 17,244 Carrying amount 70,874 38,349 25,773 16,945 23,790 from continuing operations of the investments Other comprehensive 7,518 (10,897) – (229) – (1,939) as at December 31, 2018 (loss)/income Revenue 1 234,732 61,838 173,006 93,342 Total comprehensive 1,457,416 (31,314) 269,647 98,981 38,485 15,305 Depreciation, depletion (14) (33,376) (5,037) (108,005) (9,280) income/(loss) and amortization Change in unrecognized – – 134,824 – 19,911 – Finance income – 1,119 180 1 108 share of losses Finance costs (9,031) (1,062) (740) (19,468) (4,105) Dividends received 79,694 – – 105,523 – 18,647

216 217 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The following tables illustrate summarized financial information of material joint ventures, based on financial statements of these entities In millions of tenge 2019 for 2017: CPC PKI In millions of tenge Ural Group Limited BVI KazGerMunay LLP Kazakhoil-Aktobe TenizService LLP Valsera Finance income 10,720 425 LLP Holding BV Finance costs (52,453) (2,769) Non-current assets 219,833 131,808 49,854 514,174 417,763 Income tax expense (111,797) (20,904) Current assets, including 57 46,381 19,768 72,382 55,449 Profit for the year 341,537 (55,286) Cash and cash equivalents 47 37,914 6,004 4,636 17,663 Other comprehensive income (6,181) (1,473) Non-current liabilities, including (63,640) (28,691) (7,431) (419,764) (211) Total comprehensive income 335,356 (56,759) Non-current financial liabilities (54,733) – – (12,536) – Dividends received – 15,004 Current liabilities, including (188) (54,424) (16,759) (154,273) (399,527) Current financial liabilities – (6,847) (7,290) (327,332) The following tables illustrate summarized financial information of material associates, based on their financial statements for 2018: Equity 156,062 95,074 45,432 12,519 73,474 Share of ownership 50% 50% 50% 48.996% 50% In millions of tenge 2018 Accumulated unrecognized – – – – – CPC PKI share of losses Non-current assets 2,147,362 410,710 Consolidation adjustments – – – – – Current assets 105,910 91,815 Carrying amount 78,031 47,537 22,716 6,134 36,737 of the investments Non-current liabilities (350,304) (45,218) as at December 31, 2017 Current liabilities (685,130) (104,043) Revenue 8 184,616 56,047 3,467 60,808 Equity 1,217,838 353,264 Depreciation, depletion (20) (34,072) (17,062) (378) (5,027) Share of ownership 20.75% 33% and amortization Goodwill 36,885 – Finance income 17 1,306 212 39 411 Carrying amount of the investment as at December 31 289,586 116,577 Finance costs (1,891) (1,014) (2,473) (116) (66) Revenue 757,734 163,263 Income tax expense (691) (53,071) 2,416 (645) (4,373) Depreciation, depletion and amortization (224,968) (26,267) Profit/(loss) for the year (3,754) 35,427 (33,576) 3,375 19,502 from continuing operations Finance income 32,779 387 Other comprehensive (loss)/ (219) (664) – – (118) Finance costs (96,267) (2,564) income Income tax expense (40,715) (40,085) Total comprehensive income/ (3,973) 34,763 (33,576) 3,375 19,384 Profit for the year 279,348 44,213 (loss) Other comprehensive income 176,033 40,886 Change in unrecognized share – – – – – of losses Total comprehensive income 455,381 85,099 Dividends received – 40,445 – – 2,377 Dividends received – 24,914

The following tables illustrate summarized financial information of material associates, based on their financial statements for 2019: The following tables illustrate summarized financial information about a material associates, based on its financial statements for 2017:

In millions of tenge 2019 In millions of tenge 2017 CPC PKI CPC PKI Non-current assets 1,992,524 330,021 Non-current assets 2,042,156 356,152 Current assets 99,635 55,086 Current assets 95,627 84,904 Non-current liabilities (38,825) (69,474) Non-current liabilities (756,148) (59,123) Current liabilities (499,392) (26,785) Current liabilities (595,179) (30,659) Equity 1,553,942 288,848 Equity 786,456 351,274 Share of ownership 20.75% 33% Share of ownership 20.75% 33% Goodwill 36,730 – Goodwill 31,905 – Carrying amount of the investment as at December 31 359,173 95,320 Carrying amount of the investment as at December 31 195,095 115,920 Revenue 867,450 131,688 Revenue 647,478 137,912 Depreciation, depletion and amortization (178,032) (49,236) Depreciation, depletion and amortization (141,191) (26,442)

218 219 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge 2017 20. INVENTORIES CPC PKI Finance income 13,043 246 In millions of tenge 2019 2018 2017 Finance costs (78,910) (3,279) Materials and supplies (at cost) 116,327 115,103 98,714 Income tax expense (49,237) (20,965) Refined products (at lower of cost and net realizable value) 53,974 99,998 84,841 Profit for the year 263,450 21,921 Gas products (at cost) 52,566 57,762 15,689 Other comprehensive income/(loss) 16,354 (992) Crude oil (at cost) 58,348 39,436 51,125 Total comprehensive income 279,804 20,929 281,215 312,299 250,369 Dividends received – 20,453 As at December 31, 2019 inventories of 47,863 million tenge are pledged as collateral (2018: 123,973 million tenge and 2017: 111,844 The following tables illustrate aggregate financial information of individually immaterial joint ventures (the Group’s proportional share): million tenge).

In millions of tenge 2019 2018 2017 Non-current assets 143,772 121,289 125,404 21. TRADE ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS Current assets 52,488 45,979 37,468 Non-current liabilities (110,096) (131,980) (127,415) In millions of tenge 2019 2018 2017 Current liabilities (62,503) (37,995) (35,006) Advances paid and prepaid expenses 138,822 96,510 95,623 Goodwill 4,050 4,050 172 Taxes receivable, other than VAT 52,642 35,556 29,577 Impairment (3,635) (3,635) (3,635) Dividends receivable 7,582 15,848 29,010 Accumulated unrecognized share of losses (16,938) (30,550) (25,661) Other receivables 15,047 15,321 13,057 Carrying amount of the investments as at December 31 41,014 28,258 22,649 Other current assets 87,357 70,016 91,613 Profit for the year from continuing operations 25,069 1,999 18,233 Less: allowance for expected credit losses (39,356) (28,528) (62,770) Other comprehensive (loss)/income – (668) 498 Total other current assets 262,094 204,723 196,110 Total comprehensive income 25,069 1,331 18,731 Trade accounts receivable 430,125 540,669 525,773 Unrecognized share of (loss)/income 13,612 (4,807) 13,600 Less: allowance for expected credit losses (32,368) (46,692) (57,906) Trade accounts receivable 397,757 493,977 467,867 The following tables illustrate aggregate financial information of individually immaterial associates (the Group’s proportional share): As at December 31, 2019, 2018 and 2017 the above assets were non-interest bearing. In millions of tenge 2019 2018 2017 Non-current assets 30,415 29,046 24,818 As at December 31, 2019 trade accounts receivable of 71,296 million tenge are pledged as collateral (2018: 72,695 million tenge Current assets 55,185 50,178 36,648 and 2017: 58,116 million tenge). Non-current liabilities (10,566) (10,469) (12,035) In 2017 in connection with revocation of Delta Bank JSC (“Delta Bank”) license by National Bank of RK and due to the uncertainty Current liabilities (51,374) (46,568) (35,371) regarding the refund of deposits placement in Delta Bank, the Group accrued 100% provision for impairment of the deposits Accumulated unrecognized share of losses (875) (875) (929) in the total amount of 36,161 thousand US dollars (equivalent to 13,835 million tenge) and reclassified deposits in other receivables. Carrying amount of the investments as at December 31 24,534 23,062 14,989 Movements in the allowance for expected credit losses of trade accounts receivable and other current assets were as follows: Profit/losses for the year from continuing operations 2,457 3,254 436 Other comprehensive income/ (loss) (398) 3,357 250 In millions of tenge Individually impaired Total comprehensive income 2,059 6,611 686 As at December 31, 2016 101,519 Unrecognized share of income/(loss) – 4 (199) Charge for the year, net (Note 12) 936 Written off (977) Transfers and reclassifications 11,856 Foreign currency translation 7,342 As at December 31, 2017 120,676 Effect of adoption of IFRS 9 as at January 1, 2018 3,658 Recovery for the year, net (Note 12) (264) Written off (59,880) Transfers and reclassifications (2) Foreign currency translation 11,032

220 221 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Individually impaired Movements in the allowance for expected credit losses of loans and receivables due from related parties were as follows:

As at December 31, 2018 75,220 In millions of tenge Charge for the year, net (Note 12) 14,138 As at January 1, 2017 – Written off (16,659) As at December 31, 2017 – Transfers and reclassifications 153 Effect of adoption of IFRS 9 as at January 1, 2018 4,611 Foreign currency translation (1,128) Recovered, net (985) As at December 31, 2019 71,724 Foreign currency translation 337 As at December 31, 2018 3,963 As at December 31, the ageing analysis of trade accounts receivable is as follows: Recovered, net (447) Foreign currency translation (8) In millions of tenge Past due but not impaired As at December 31, 2019 3,508 Total Neither past due <30 days 30-60days 61-90 days 91-120 days >120 days nor impaired 2019 397,757 364,443 19,633 5,130 1,808 1,199 5,544 2018 493,977 448,671 23,935 5,018 4,504 4,822 7,027 23. CASH AND CASH EQUIVALENTS 2017 467,867 365,858 17,506 38,832 16,447 2,292 26,932 In millions of tenge 2019 2018 2017 Term deposits with banks – US dollars 108,298 743,646 792,428 22. LOANS AND RECEIVABLES DUE FROM RELATED PARTIES Term deposits with banks – tenge 210,354 195,093 115,103 Term deposits with banks – other currencies 6,450 3,492 3,279

In millions of tenge 2019 2018 2017 Current accounts with banks – US dollars 633,231 538,440 306,716 Current accounts with banks – tenge 75,168 39,137 30,398 Loans due from related parties at amortized cost 509,003 495,869 785,593 Current accounts with banks – other currencies 10,220 9,658 8,847 Loans due from related parties at fair value through profit or loss 214,395 263,274 – Cash in transit 19,991 8,914 5,538 Bonds receivable from Samruk-Kazyna 16,290 15,364 18,342 Cash-on-hand and cheques 1,150 1,204 1,684 Note receivable from a shareholder of a joint venture 13,627 16,599 38,016 Less: allowance for expected credit losses (410) (131) (6) Lease receivable from a joint venture 4,458 – – 1,064,452 1,539,453 1,263,987 Less: allowance for expected credit losses (3,508) (3,963) – 754,265 787,143 841,951 Cash and cash equivalents attributable to discontinued – 6,395 2,618 operations In accordance with IFRS 9, the Group reclassified certain loans as measured at fair value through profit or loss. The fair value 1,064,452 1,545,848 1,266,605 of these loans was determined by discounting future cash flows.

Term deposits with banks are made for various periods of between one day and three months, depending on the immediate cash The table below illustrates loans and receivables due from related parties in currencies their denominated in requirements of the Group.

In millions of tenge 2019 2018 2017 As at December 31, 2019, the weighted average interest rate for time deposits with banks was 2.02% in US dollars, 8.84% in tenge Loans due from related parties in tenge 510,240 471,541 471,798 and 0.12% in other currencies, respectively (2018: 2.84% in US dollars, 7.58% in tenge and 0.07% in other currencies, respectively, 2017: 1.04% in US dollars and 7.85% in tenge, respectively). Loans due from related parties in US dollars 206,285 280,952 311,341

Bonds receivable from Samruk-Kazyna in tenge 16,241 15,315 18,342 As at December 31, 2019, 2018 and 2017 cash and cash equivalents were not pledged as collateral. Note receivable from a shareholder of a joint venture in US dollars 13,627 16,599 38,016 Lease receivable from a joint venture in US dollars 4,448 – – Loans due from related parties in other foreign currencies 3,424 2,736 2,454 754,265 787,143 841,951

Current portion 138,719 148,615 169,502 Non-current portion 615,546 638,528 672,449 754,265 787,143 841,951

222 223 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

24. EQUITY DISTRIBUTIONS TO SAMRUK-KAZYNA In 2019, the Company transferred to Samruk-Kazyna the proceeds from sale of its non-core assets of 3,853 million tenge, that were Total number of outstanding, issued and paid shares comprises: recognized as distribution to Samruk-Kazyna within the framework of Government decrees on transfer of KMG’s non-core assets and in accordance with the decision of the Management Board of Samruk-Kazyna. In addition, in 2019 Group accrued and paid December 31, 2017 Issued in 2018 December 31, 2018 Issued in 2019 December 31, off 568 million tenge, distributed by Ozenmunaigas in accordance with the Government decree on housing of the residents, living 2019 in Zhana-ozen town. Number of shares issued and paid, 589,399,889 20,719,604 610,119,493 – 610,119,493 including In 2019, the Group fully settled its commitments of 20,900 million tenge for social facilities construction in Turkestan city recognized Par value of 27,726.63 tenge 137,900 – 137,900 – 137,900 within distributions to Samruk-Kazyna in 2018, including additional distribution of 1,773 million tenge recognised in 2019. In addition, the Group transferred cash payments of 9,203 million tenge to fulfill its commitments of constructing the Palace of martial arts Par value of 10,000 tenge – 20,719,604 20,719,604 – 20,719,604 in Astana city recognized within distributions to Samruk-Kazyna in 2016-2017. Par value of 5,000 tenge 59,707,029 – 59,707,029 – 59,707,029 Par value of 2,500 tenge 71,104,187 – 71,104,187 – 71,104,187 Additionally, in 2018 distributions to Samruk-Kazyna also included the results of operations of PSA LLP (subsidiary of the Group) in the total amount of 6,473 million tenge and the adjustment of the fair value of cost of gas pipelines received as a payment Par value of 2,451 tenge 1 – 1 – 1 for the issued common shares of 10 million tenge. Par value of 1,000 tenge 1 – 1 – 1 Par value of 921 tenge 1 – 1 – 1 In 2017 distributions to Samruk-Kazyna includes accrual of provision for construction of the Palace of martial arts in Astana city Par value of 858 tenge 1 – 1 – 1 of 5,544 million tenge and the results of operations of PSA LLP in the total amount of 5,793 million tenge. Par value of 838 tenge 1 – 1 – 1 In 2017 due to transfer of obligations for reconstruction of the trade and exhibition center in Moscow to Corporate Fund “TVC Par value of 704 tenge 1 – 1 – 1 Kazakhstan”, the Company reversed previously recognized provision of 4,459 million tenge. Par value of 592 tenge 1 – 1 – 1 As at December 31, 2017 the Group recognized the discount on purchased bonds of “Special financial company DSFK” LLP through Par value of 500 tenge 458,450,766 – 458,450,766 – 458,450,766 retained earnings of 16,756 million tenge. Share capital (thousands of tenge) 709,344,505 207,196,040 916,540,545 – 916,540,545

DIVIDENDS SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL In 2019, the Group declared dividends to the non-controlling interests holders in KTO, KMGI and KMG EP (subsidiaries As at December 31, 2019, 2018 and 2017, the Company had only one class of issued shares. of the Company) in the amount of 4,138 million tenge (December 31, 2018: 6,200 million tenge and as at December 31, 2017: 13,269 million tenge). As at December 31, 2019 and 2018, common shares in the number of 239,440,103 were authorized, but not issued (2017: 260,159,707 common shares). In 2019, based on the decision of Samruk-Kazyna and National Bank of RK, the Company declared dividends for 2018 of 60.64 tenge per common share in the total amount of 36,998 million tenge. In 2018, the Company declared and paid dividends for 2017 In 2018 the Company issued 20,719,604 common shares (2017: 5,187,152 common shares). As consideration the Company received of 61.54 tenge per common share in the total amount of 36,272 million tenge. In 2017, the Company declared dividends for 2016 high, medium and low pressure gas pipelines and associated facilities with the fair value of 207,196 million tenge (2017: 12,968 million of 11.32 tenge per common share in the amount of 6,672 million tenge and dividends for 2013 of 66.52 tenge per common share tenge) that were previously recognized as additional paid-in capital and cash for 7 thousand tenge (2017: 1 thousand tenge). The gas in the amount of 39,207 million tenge. pipelines were recognized as additional paid-in capital based on trust management agreement, which served as a mechanism until the legal title for pipelines transferred to the Group. SHARE BUYBACK OF SUBSIDIARY – KMG EP Additionally, in 2018 the Group increased additional paid in capital of 4,114 million tenge (2017: 13,189 million tenge), which represents the fair value of gas pipelines contributed by the Government on trust management terms. On 22 February 2019, KMG EP completed its preferred shares buyback program. On May 14, 2019, preferred shares were delisted from KASE. In accordance with the buyback program in 2019 KMG EP made a total buyback of outstanding preferred and ordinary shares for 2,464 million tenge (2018: 642,524 million tenge, 2017: nil) as a part of the repurchasing program of all outstanding GDR TRANSACTIONS WITH SAMRUK-KAZYNA and common shares quoted on KASE.

In 2019 the Company provided to Samruk-Kazyna additional tranches of 54,720 million tenge (2018: 52,293 million tenge and 2017: 47,020 million tenge) under interest-free long-term financial aid agreement signed on December 25, 2015, with a current maturity BOOK VALUE PER SHARE in 2022. In 2019 the difference between the fair value and nominal value of additional tranches of 14,184 million tenge (2018: 10,188 million tenge and 2017: 5,716 million tenge) was recognized as transactions with Samruk-Kazyna in the consolidated statement In accordance with the decision of KASE dated October 4, 2010 financial statements shall disclose book value per share (ordinary of changes in equity. and preferred) as of the reporting date, calculated in accordance with the KASE rules.

In 2018 the Company extended the maturity period of the interest-free long-term financial aid agreement and recognized the effect In millions of tenge 2019 2018 2017 of modification of 78,358 million tenge as transactions with Samruk-Kazyna in the consolidated statement of changes in equity. Total assets 14,081,915 14,015,280 13,549,958 In 2017 Samruk-Kazyna changed conditions of the prospectus of the second bond issue, according to which the coupon on the bonds Less: intangible assets 171,172 173,077 185,205 was reduced from 4.00% to 0.50%, and recognized the modification effect of 24,020 million tenge through equity as transactions Less: total liabilities 5,885,259 6,872,211 6,766,353 with Samruk-Kazyna in the consolidated statement of changes in equity. Net assets 8,025,484 6,969,992 6,598,400 Number of ordinary shares 610,119,493 610,119,493 589,399,889 Book value per ordinary share 13.154 11.424 11.195

224 225 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

EARNINGS PER SHARE In millions of tenge Rompetrol KazTransOil JSC KazMunayGas Rompetrol Rompetrol Rompetrol Downstream S.R.L. Exploration Petrochemicals S.R.L. Rafinare S.A. Vega Production JSC In millions of tenge 2019 2018 2017 Profit/(loss) 6,884 56,653 272,863 19,830 (143,227) 10,657 for the year Weighted average number of common shares 601,486,325 601,486,325 588,967,626 from continuing for basic and diluted earnings per share operations Basic and diluted share in net profit for the period 1.899 1.137 0.891 Total comprehensive 6,511 53,448 267,684 19,471 (141,676) 10,792 Basic and diluted share in net profit for the period 1.899 1.147 0.898 income/(loss) from continuing operations for the year, net of tax Attributable to: Equity holder 3,557 48,045 266,518 10,637 (77,204) 5,895 of the Parent Company NON-CONTROLLING INTEREST Non-controlling 2,954 5,403 1,166 8,834 (64,472) 4,897 interest The following tables illustrate information of subsidiaries in which the Group has significant non-controlling interests: Dividends declared — (3,999) (16) — — — to non-controlling Country 2019 2018 2017 interests of incorporation Summarized cash flow and operation Non-controlling Carryingvalue Non-controlling Carrying Non-controlling Carrying shares shares value shares value information Operating activity 11,581 94,060 237,576 1 70,429 3,666 KazTransOil JSC Kazakhstan 10.00% 44,733 10.00% 43,382 10.00% 42,862 Investing activity 3,183 (57,033) (368,188) — (26,015) (3,541) KazMunayGas Kazakhstan 0.30% 9,733 0.50% 9,056 36.99% 779,932 Exploration Financing activity (14,590) (41,853) (4,457) — (43,941) (46) Production JSC Net increase/ 174 (4,630) (139,237) 1 473 79 Rompetrol Romania 45.37% 51,591 45.37% 49,330 45.37% 46,577 (decrease) in cash Downstream S.R.L. and cash equivalents Rompetrol Romania 45.37% 5,518 45.37% (3,316) 45.37% 8,699 Petrochemicals S.R.L. The following tables illustrate summarized financial information of subsidiaries on a stand-alone basis, in which the Group has significant Rompetrol Vega Romania 45.37% (16,289) 45.37% (21,181) 45.37% (19,743) non-controlling interests as at December 31, 2018 and for the year then ended: Rompetrol Rafinare Romania 45.37% (74,441) 45.37% (9,855) 45.37% 706 S.A. In millions of tenge Rompetrol KazTransOil JSC KazMunayGas Rompetrol Rompetrol Rompetrol Downstream S.R.L. Exploration Petrochemicals S.R.L. Rafinare S.A. Vega Other 17,410 13,064 10,985 Production JSC 38,255 80,480 870,018 Summarized statement of financial position Non-current assets 115,878 474,493 855,098  226,762 25,547 The following tables illustrate summarized financial information of subsidiaries on a stand-alone basis, in which the Group has significant Current assets 130,109 89,618 1,121,114 14,248 208,058 10,486 non-controlling interests as at December 31, 2019 and for the year then ended: Non-current liabilities (51,580) (65,939) (59,533) (660) (99,909) (28,237)

In millions of tenge Rompetrol KazTransOil JSC KazMunayGas Rompetrol Rompetrol Rompetrol Current liabilities (85,683) (68,156) (192,006) (20,897) (356,631) (54,478) Downstream S.R.L. Exploration Petrochemicals S.R.L. Rafinare S.A. Vega Total equity 108,724 430,016 1,724,673 (7,309) (21,720) (46,682) Production JSC Attributable to: Summarized statement Equity holder 59,394 386,634 1,715,617 ( 3 , 9 9 3 ) ( 1 1 , 8 6 5 ) (25,501) of financial position of the Parent Company Non-current assets 114,262 490,914 893,471 3,800 102,697 27,272 Non-controlling 49,330 43,382 9,056 ( 3 , 3 1 6 ) ( 9 , 8 5 5 ) (21,181) interest Current assets 135,270 104,433 1,235,457 9,024 219,194 9,511 Summarized statement Non-current liabilities (56,084) (78,008) (75,452) (643) (93,091) (24,905) of comprehensive income Current liabilities (79,741) (74,699) (167,393) (19) (392,868) (47,778) Revenue 552,546 225,400 1,189,393 74,024 1,198,576 78,746 Total equity 113,707 442,640 1,886,083 12,162 (164,068) (35,900) Profit/(loss) (10,087) 61,168 299,917 (27,398) (22,771) 3,208 Attributable to: for the year from continuing Equity holder 62,116 397,907 1,876,350 6,644 (89,627) (19,611) operations of the Parent Company Total comprehensive 6,067 67,673 334,747 (26,480) (23,276) (3,168) Non-controlling 51,591 44,733 9,733 5,518 (74,441) (16,289) income/(loss) interest for the year, net Summarized statement of tax of comprehensive income Revenue 610,232 239,626 1,119,068 — 1,316,167 85,831

226 227 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Rompetrol KazTransOil JSC KazMunayGas Rompetrol Rompetrol Rompetrol In millions of tenge Rompetrol KazTransOil JSC KazMunayGas Rompetrol Rompetrol Rompetrol Downstream S.R.L. Exploration Petrochemicals S.R.L. Rafinare S.A. Vega Downstream S.R.L. Exploration Petrochemicals S.R.L. Rafinare S.A. Vega Production JSC Production JSC Attributable to: Summarized cash flow Equity holder 3,314 60,994 314,578 (14,466) (12,716) (1,731) information of the Parent Company Operating activity 20,967 98,946 234,063 (2) 35,474 1,223 Non-controlling 2,753 6,679 20,169 (12,014) (10,560) (1,437) Investing activity (2,622) (67,271) 44,736 – (36,389) (1,217) interest Financing activity (17,790) (59,617) (18,906) – (661) 8 Dividends declared – (6,153) (48) – – – to non-controlling Net increase/ 555 (28,424) 259,552 (2) (1,576) 14 interests (decrease) in cash and cash equivalents Summarized cash flow information Operating activity 8,598 97,453 276,070 (1) 42,428 1,653 Investing activity (4,442) (44,854) 164,487 – (15,532) (1,667) 25. BORROWINGS Financing activity (4,304) (61,540) (642,760) (1) (27,347) 38 Net increase/ (148) (7,592) (134,732) (2) (451) 24 (decrease) in cash In millions of tenge 2019 2018 2017 and cash equivalents Fixed interest rate borrowings 3,146,477 3,029,688 3,137,182 Weighted average interest rates 5.48% 5.42% 6.30% The following tables illustrate summarized financial information of subsidiaries on a stand-alone basis, in which the Group has significant Floating interest rate borrowings 691,027 1,123,550 1,164,070 non-controlling interests as at December 31, 2017 and for the year then ended: Weighted average interest rates 5.73% 5.70% 4.90% 3,837,504 4,153,238 4,301,252 In millions of tenge Rompetrol KazTransOil JSC KazMunayGas Rompetrol Rompetrol Rompetrol Downstream S.R.L. Exploration Petrochemicals S.R.L. Rafinare S.A. Vega US dollar – denominated borrowings 3,555,347 3,927,512 4,069,683 Production JSC Tenge – denominated borrowings 271,776 207,276 220,729 Summarized statement Euro-denominated borrowings 2,881 1,866 – of financial position Other currencies – denominated borrowings 7,500 16,584 10,840 Non-current assets 119,373 450,726 771,619 3,418 219,853 21,455 3,837,504 4,153,238 4,301,252 Current assets 121,461 99,864 1,562,165 25,181 213,573 9,848 Current portion 253,428 330,590 884,140 Non-current liabilities (13,368) (60,819) (53,790) (2,680) (50,695) (24,447) Non-current portion 3,584,076 3,822,648 3,417,112 Current liabilities (124,809) (65,826) (171,272) (6,747) (381,175) (50,370) 3,837,504 4,153,238 4,301,252 Total equity 102,657 423,945 2,108,722 19,172 1,556 (43,514) Attributable to: In 2019, the Company derecognized a loan from partners of the Pearls project for the total amount of 110,930 million tenge, Equity holder 56,080 381,083 1,328,790 10,473 850 (23,771) including an interest of 3,543 million tenge, since the partners of the project decided to voluntarily relinquish the contract area of the Parent Company under the Pearls PSA (Note 13). Non-controlling 46,577 42,862 779,932 8,699 706 (19,743) interest In 2018, the Company derecognized a loan from ONGC Videsh, a partner in the Satpayev project, for the total amount of 53,263 million tenge, including an interest of 4,620 million tenge. The derecognition of the loan is related to the planned withdrawal Summarized statement from the project and relinquishment of the contract area to the Government. of comprehensive income Revenue 402,786 222,450 954,506 65,576 868,443 56,964 Profit/(loss) 10,745 65,890 195,361 (4,905) (1,696) 2,060 for the year from continuing operations Total comprehensive 10,632 66,003 194,983 (5,079) (2,357) 2,249 income/(loss) for the year, net of tax Attributable to: Equity holder 5,808 59,403 122,876 (2,775) (1,288) 1,229 of the Parent Company Non-controlling 4,824 6,600 72,107 (2,304) (1,069) 1,020 interest Dividends declared – (5,961) (7,309) – – – to non-controlling interests

228 229 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

As at December 31, 2019, 2018 and 2017, the debt securities issued and loans comprised:

As at December 31 As at December 31

Bonds Issuance amount Redemption date Interest 2019 2018 2017 Bonds Issuance amount Redemption date Interest 2019 2018 2017 AIX 2019 56 billion KZT 2024 5.00% 52,843 – – Japan Bank 297.5 million USD 2025 2.19%+CIRR, 6 M 65,254 76,452 62,387 for International Libor+1.10% Bonds LSE 2018 1.5 billion USD 2048 6.375% 574,230 576,571 – Cooperation (JBIC) Bonds LSE 2018 1.25 billion USD 2030 5.375% 482,393 484,362 – Halyk bank JSC 150 million USD 2024 5.00% 52,771 – – Bonds LSE 2018 0.5 billion USD 2025 4.75% 192,764 193,533 – (Halyk bank) Bonds LSE 2017 1.25 billion USD 2047 5.75% 468,940 477,347 412,644 European Bank 68 billion KZT 2023 3M CPI + 50 basis 42,940 54,408 65,373 for Reconstruction points + 3.15% Bonds LSE 2017 1 billion USD 2027 4.75% 380,413 384,384 332,128 and Development Bonds ISE 2017 750 million USD 2027 4.375% 289,487 290,607 251,245 (EBRD) Bonds LSE 2017 0.5 billion USD 2022 3.88% 191,694 193,026 166,819 Halyk bank 100 million USD 2020 5.00% 38,323 26,939 23,316 Bonds LSE 2014 1 billion USD 2044 6.00% – 11,211 9,682 EBRD 39 billion KZT 2026 6M CPI + 100 24,573 20,359 15,620 basis points + Bonds LSE 2014 0.5 billion USD 2025 4.875% – – 40,465 3.15% Bonds LSE 2013 1 billion USD 2023 4.40% 154,442 155,214 133,839 Sperbank Russia 50 million USD 2020 COF (2.25%) + 13,773 – – 1.50% Bonds LSE 2013 2 billion USD 2043 5.75% – – 166,367 Loan from partners Financing for share From beginning 6M Libor + 1.00% – 106,246 87,371 Bonds LSE 2010 1.5 billion USD 2020 7.00% – – 454,158 (Pearls project) of costs in execution of commercial Bonds LSE 2010 1.25 billion USD 2021 6.375% – – 374,885 of subsoil use contract exploration Bonds KASE 2009 120 billion KZT 2019 6M Libor+8.50% – 42,721 73,637 Loan from partners Financing for share From beginning 12М Libor + – – 51,214 (Satpayev project) of costs in execution of commercial 1.50% Bonds LSE 2008 1.6 billion USD 2018 9.125% – – 530,055 of subsoil use contract exploration Others 4,518 4,440 13,276 BNP Paribas 368 million USD 2020 COF (3.18%) + – 25,199 14,118 2.00% Total 2,791,724 2,813,416 2,959,200 Club loan 200 million USD 2019 3M Libor + – 17,684 35,697 Loans (Raiffeisen/BCR/ING/ 2.50% Unicredit) The Export-Import 1.13 billion USD 2027 6M Libor + 4.10% 350,042 398,978 340,200 Bank of China Sberbank Russia 400 million USD 2024 12М Libor + 3.5% – – 134,039 (Eximbank) Other – – – 12,773 25,282 19,858 Development bank 185 billion KZT 2022-2028 7.00%-10.20% 138,313 120,225 115,480 of Kazakhstan JSC Total 1,045,780 1,339,822 1,342,052 (DBK) DBK 1.1 billion USD 2023-2025 6M Libor + 131,022 292,594 294,632 On January 10, 2019, Atyrau Refinery LLP (ANPZ) placed indexed tenge to US dollars bonds at the Astana International Exchange 4.00%, 5.00%, (AIX) for the total amount of 56,223 million tenge (equivalent to 150 million US dollars) with interest rate of 5% and maturity of 5 10.99% years. On January 10, 2019, Samruk-Kazyna purchased these bonds for 56,223 million tenge. On January 11, 2019, ANPZ received The Syndicate 360 million USD 2022 1M 99,554 98,831 82,747 long-term loan from Halyk bank of 150 million US dollars (equivalent to 56,195 million tenge), with 5% interest rate for the first year of banks (Unicredit, Libor+2.75%, 1M (since the second year the interest year is 5.25%) and maturity of 5 years. ING Bank, BCR, Libor+2.5%,1M Raiffeisen Bank) Robor+2.00%,1W Libor +2.5%, ON Proceeds from the borrowings above in the total amount of 300 million US dollars (equivalent to 113,016 million tenge) were Libor +2.5%, ON used to make an early repayment of loan principal of ANPZ borrowings from DBK, raised to fund a strategic investment project – Euribor+2.5% construction of the aromatic hydrocarbons production unit. In December 2019, ANPZ received long-term loan from DBK of 32,938 The Syndicate 200 million USD 2021 3M Libor+1.35% 76,442 76,625 – million tenge with 7.99% nominal interest rate and maturity of 7 years to finance the oil processing plant modernisation. of banks (Citibank, N.A., London Branch, In 2019, the Group made an additional redemption of borrowings from DBK for 77,182 million tenge and the bonds held by DBK Mizuho Bank, Ltd., MUFG Bank Ltd., (Bonds KASE 2009 with a number of 16 million bonds) for 43,868 million tenge, including accrued interest. Société Générale, ING Bank, and ING In 2019, ANPZ has made partial repayment of the loan from Eximbank for 197 million US dollars (equivalent to 74,968 million tenge), Bank N.V.) including accrued interest.

In 2019, KMG International N.V. made the repayments to BNP Paribas and partly redempt Syndicated loan a number of other banks amounted to 65 million US dollars (equivalent to 24,821 million tenge), including accrued interest, of its short-term loans used to finance working capital and for trading facilities.

1. 8 revolving credit facility

230 231 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In May 2019, KMG International N.V. made a full early repayment of its Club loan for 47 million US dollars (equivalent to 17,739 million Changes in liabilities arising from financing activities tenge), including accrued interest. In millions of tenge 2019 2018 2017 In April, 2019, the Company made early redemption of Eurobonds with maturity date of 2044 for 31 million US dollars (equivalent On January 1 4,153,238 4,301,252 3,274,415 to 11,909 million tenge at the date of payment), including premium, coupon payments and consent fee. Received by cash 271,772 1,248,834 1,506,706

On April 24, 2018, the Company completed the placement of the Eurobonds under the 10.5 billion US dollars Global Medium Term Repayment of debt for purchased property plant and equipment – 33,216 135,393 Notes Programme established by the Company and KazMunaiGaz Finance Sub B.V. (subsidiary of the Company), in an aggregate Interest paid (238,354) (248,341) (216,528) principal amount of 3.25 billion US dollars. The Eurobonds were issued in three series, comprising (i) 500 million US dollars 4.750% Repayment of principal (444,656) (2,069,977) (680,202) Notes due 2025 (equivalent to 163,260 million tenge); (ii) 1,250 million US dollars 5.375% Notes due 2030 (equivalent to 408,150 million tenge); and (iii) US 1,500 million US dollars 6.375% Notes due 2048 (equivalent to 489,780 million tenge). Interest accrued (Note 14) 225,093 250,055 217,246 Interest capitalized (Note 15) 2,525 21,715 26,532 On May 4 and 11, 2018, the Company made early redemption of Eurobonds for total consideration in the total amount of 3,463 Discount (7,781) (6,528) (15,552) million US dollars (equivalent to 1,143,982 million tenge at the date of payment), including interest. On July 2, 2018 the Company Derecognition of liabilities (Note 14) (111,476) (53,263) – made full redemption of debt on issued bonds on the LSE in 2008 in the total amount of 1,673 million US dollars (equivalent 570,627 million tenge), including interest. Interest accrued for bond redemption (Note 14) – 89,612 – Foreign currency translation (10,953) 385,144 70,415 On May 17, 2018 in accordance with the loan agreement KTG received a loan from Foreign exchange loss/gain (7,366) 189,251 (13,492) the Syndicate of banks of 65,832 million tenge (equivalent to: 200 million US dollars) for partial financing of the project “Construction Other 5,462 12,268 (3,681) of three compressor stations at MG “Beineu-Bozoy-Shymkent” at the rate of 3 months LIBOR + 1.35%. On December 31 3,837,504 4,153,238 4,301,252 Current portion 253,428 330,590 884,140 In 2018, ANPZ received borrowings from Halyk bank JSC of 44,883 million tenge and fully redeemed borrowings from Halyk bank JSC Non-current portion 3,584,076 3,822,648 3,417,112 of 43,665 million tenge, including accrued interest. Additionally, in 2018, ANPZ partially redeemed a loan from Eximbank of 42,448 million tenge.

In 2018, ICA, the subsidiary of KTG, received a short-term loan from Citibank N.A. Jersey Branch of 27,173 million tenge (equivalent COVENANTS to 85 million US dollars) at the rate of 1 month LIBOR + 2% per annum for the purpose of restructuring existing obligations. In 2018, ICA fully repaid principal under the loan agreement of 27,804 million tenge (equivalent to 85 million US dollars). In 2019 ICA partially The Group is required to ensure execution of the financial and non-financial covenants under the terms of the loan agreements. repaid its borrowing from EBRD for 17,365 million tenge. Failure to comply with financial covenants gives the lenders the right to demand early repayment of loans. As of December 31, 2019, 2018 and 2017, the Group complied with all financial and non-financial covenants. In 2018, the Company fully redeemed a loan from Sberbank Russia of 420 million US Dollars (equivalent to 152,989 million tenge), including accrued interest. In 2018 and 2017, the Group had limitations in terms of the acceptance of debt obligations according to the terms and conditions of the Eurobond documentation of international bonds issues. Thus, the debt increase was limited to the need to comply In 2018, KMGI made partial repayment of borrowings from Syndicated loan of 20,017 million tenge, including accrued interest. with a financial ratio, which was defined as the ratio of consolidated net debt to the total amount of the consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) with a threshold value of 3.5. As of December 31, 2019, December In 2018 the Group received borrowings from DBK in the total amount of 15,933 million tenge and redeemed borrowings in the total 31, 2018 and December 31, 2017, the Group complied with this restrictive condition. In 2019 the Company received a consent amount of 80,419 million tenge, including interest. Additionally, the Group made a partial scheduled repayment of issued bonds held from the Eurobond holders resulting in revision of the covenant package. Accordingly, the limitation was excluded from the terms by DBK of 41,793 million tenge, including interest. of the public debt of KMG.

HEDGE OF NET INVESTMENT IN THE FOREIGN OPERATIONS

As at December 31, 2019 certain borrowings denominated in foreign currency were designated as hedge instrument for the net investment in the foreign operations. These borrowings are being used to hedge the Group’s exposure to the US Dollar foreign exchange risk on these investments. In 2019 gain of 10,332 million tenge (2018: losses of 364,168 million tenge; 2017: income of 67,151 million tenge) on the translation of these borrowings were transferred to other comprehensive income and offset translation gains and losses of the net investments in the subsidiaries (foreign operations).

There is an economic relationship between the hedged item and the hedging instrument as the net investment creates a translation risk that will match the foreign exchange risk on the US Dollars borrowings. The Group has established a hedge ratio of 1:1 as the underlying risk of the hedging instrument is identical to the hedged risk component. The hedge ineffectiveness will arise when the amount of the investment in the foreign subsidiary becomes lower than the amount of the fixed rate borrowings.

232 233 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

26. PROVISIONS Current portion and long-term portion are segregated as follows: In millions of tenge Asset Provision Provisionfor Provision for gas Employee benefit Other Total In millions of tenge Asset Provision Provision Provision for gas Employee benefit Other Total retirement for environmental taxes transportation obligations retirement for environmen- for taxes transpor-tation obligations obligations obligation obligations tal obligation As at December 31, 2019 As at December 31, 91,544 47,402 48,047 24,361 32,378 34,253 277,985 Current portion 805 7,728 18,184 27,965 6,425 42,431 103,538 2016 Long-term portion 153,589 52,618 – – 52,634 14,748 273,589 Foreign currency 10 (52) 15 – 3,807 (1) 3,779 translation As at December 31, 154,394 60,346 18,184 27,965 59,059 57,179 377,127 2019 Change in estimate (1,248) (458) – (70) – 62 (1,714) Unwinding of discount 8,333 1,609 – – 3,040 68 13,050 As at December 31, 2018 Provision for the year 3,488 10,902 7,305 – 4,214 12,946 38,855 Current portion 1,994 6,103 20,334 28,083 2,830 39,127 98,471 Transfer to assets held – (33) – – – (58) (91) Long-term portion 114,242 56,875 – – 44,649 14,031 229,797 for sale As at December 31, 116,236 62,978 20,334 28,083 47,479 53,158 328,268 Recovered (678) – (16,528) – – (5,457) (22,663) 2018 Use of provision (903) (1,164) (11,162) – (3,091) (26,614) As at December 31, 2017 (10,294) Current portion 1,543 5,922 27,677 24,291 2,689 16,690 78,812 As at December 31, 100,546 58,206 27,677 24,291 40,348 31,519 282,587 2017 Long-term portion 99,003 52,284 – – 37,659 14,829 203,775 Foreign currency 1,930 5,491 10 1 41 2,097 9,570 As at December 31, 100,546 58,206 27,677 24,291 40,348 31,519 282,587 translation 2017 Change in estimate 4,657 344 – 3,791 – (85) 8,707 Unwinding of discount 9,232 2,291 – – 3,204 133 14,860 Provision for the year 654 – 18,445 – 7,374 45,173 71,646 Recovered (133) (43) (24,903) – – (6,410) (31,489) 27. OIL SUPPLY AGREEMENT Use of provision (650) (3,319) (895) – (3,488) (19,219) (27,571)

Transfers – 8 – – – (50) (42) In 2016, the Group entered into long-term crude oil and liquefied petroleum gas (“LPG”) supply agreement, which involves and reclassifications a prepayment. These prepayments for oil represent contract liability and were accounted for in accordance with IFRS 15. As at December 31, 116,236 62,978 20,334 28,083 47,479 53,158 328,268 The agreement stipulated pricing calculation with reference to market quotes and prepayments were settled through physical 2018 deliveries of crude oil and LPG. The total minimum delivery volume approximates 38.4 million tons of crude oil and 1.25 million ton Foreign currency (83) (167) (13) (118) – 69 (312) of LPG in the period from the date of the contract to June and August 2021. translation Change in estimate 25,990 (7) – – – 50 26,033 The Group accrued interest for 19,541 million tenge (2018: 35,868 million tenge, 2017: 26,473 million tenge) with interest rate of Libor Unwinding of discount 10,005 3,670 – – 3,559 144 17,378 + 1.85% (Note 14).

Provision for the year 4,618 2,888 4,393 – 11,568 40,473 63,940 The Group fully settled the prepayment through oil and LPG delivery on November 29, 2019. Recovered (208) (4,490) (5,865) – – (18,116) (28,679) Use of provision (2,164) (4,526) (1,147) – (3,547) (16,677) (28,061) Transfers – – 482 – – (1,922) (1,440) and reclassifications As at December 31, 154,394 60,346 18,184 27,965 59,059 57,179 377,127 2019

Provision for gas transportation relates to the Group’s commitment on reimbursement of losses incurred by PetroChina International Co.Ltd (PetroChina). Under the agreement on gas borrowing the Group has commitments to PetroChina to reimburse the supported costs and losses incurred by PetroChina due to gas borrowing and its return. Detailed description of significant provisions, including critical estimates and judgments used, is included in Note 4.

234 235 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

28. TRADE ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES 30. INCOME TAX EXPENSES

In millions of tenge 2019 2018 (Reclassed) 2017 (Reclassed) As at December 31, 2019 income taxes prepaid of 54,517 million tenge (2018: 53,143 million tenge, 2017: 36,135 million tenge) are represented by corporate income tax. As at December 31, 2019 income taxes payable of 13,011 million tenge (2018: 13,272 Contract liabilities 184,362 106,385 87,917 million tenge, 2017: 10,081 million tenge) are represented mainly by excess profit tax and corporate income tax. Due to employees 51,613 51,362 60,546 Financial guarantees 5,866 1,831 1,171 Income tax expense comprised the following for the years ended December 31: Dividends payable 354 1,750 1,852 In millions of tenge 2019 2018 2017 Other 60,821 74,835 50,454 Current income tax Total other current liabilities 303,016 236,163 201,940 Corporate income tax 146,658 160,011 112,227 Trade accounts payable 667,861 632,739 513,851 Excess profit tax 11,291 (1,128) 5,137 Withholding tax on dividends and interest income 12,893 25,517 21,967 Trade accounts payable is denominated in the following currencies as of December 31: Deferred income tax

In millions of tenge 2019 2018 2017 Corporate income tax (1,999) 10,093 22,394 Excess profit tax (4,904) (7,850) (1,275) Tenge 328,538 260,094 218,849 Withholding tax on dividends 62,241 92,617 29,835 US dollars 280,742 301,784 240,165 Income tax expenses 226,180 279,260 190,285 Romanian Leu 42,740 45,125 42,582 Euro 3,196 7,188 2,789 According to the 2006 amendments to the tax legislation, which were effective starting from the fiscal years beginning on January 1, Other currency 12,645 18,548 9,466 2007, dividends received from Kazakhstan taxpayers were exempt from income tax withheld at the source of payment. Therefore, Total 667,861 632,739 513,851 in 2006 the Group reversed the deferred tax liability on undistributed profits of subsidiaries, joint ventures and associates registered in the Republic of Kazakhstan, which was recognized in prior years. However, during 2007-2019 the Group was receiving As at December 31, 2019, 2018 and 2017, trade accounts payable and other current liabilities were not interest bearing. dividends from Tengizchevroil LLP (20% joint venture of the Group, a Kazakhstan taxpayer) net of withholding tax since there is uncertainty whether the withholding tax exemption is applicable for the stable tax regime of Tengizchevroil LLP. The Group was challenging withholding of the tax on those dividends, but has not managed to convince Tengizchevroil LLP and the tax authorities that withholding tax should not be applied. Therefore, Management of the Group recognizes the deferred income tax withholding 29. OTHER TAXES PAYABLE on its interest in undistributed retained earnings of Tengizchevroil LLP as its current best estimate is that the Group will continue to receive dividends net of withholding tax in future years. In millions of tenge 2019 2018 2017 Rent tax on crude oil export 29,586 33,184 27,365 A reconciliation of income tax expenses applicable to profit before income tax at the statutory income tax rate (20% in 2019-2017) to income tax expenses was as follows for the years ended December 31: Mineral extraction tax 19,037 28,039 26,161

VAT 19,376 19,117 19,448 In millions of tenge 2019 2018 2017 Individual income tax 6,135 6,603 6,581 Profit before income tax from continuing operations 1,384,631 969,318 719,399 Social tax 4,639 4,197 5,620 Profit/(loss) before income tax from discontinued operations 6 3,493 (3,405) Excise tax 2,163 2,885 2,888 Statutory tax rate 20% 20% 20% Withholding tax from non-residents 1,873 2,868 4,545 Income tax expense on accounting profit 276,927 194,562 143,199 Other 3,857 8,133 8,590 Share in profit of joint ventures and associates (103,138) (73,593) (39,493) 86,666 105,026 101,198 Other non-deductible expenses and non-taxable income 36,913 61,618 41,106

Excess profit tax 6,387 (8,978) 3,861 Effect of different corporate income tax rates 13,047 13,149 3,234 Change in unrecognized deferred tax assets (3,956) 92,542 38,640 226,180 279,300 190,547

Income tax expense attributable to continued operations 226,180 279,260 190,285 Income tax expense attributable to discontinued operations – 40 262 226,180 279,300 190,547

236 237 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

Deferred tax balances, calculated by applying the statutory tax rates effective at the respective reporting dates to the temporary differences between the tax basis of assets and liabilities and the amounts reported in the consolidated financial statements, are comprised of the following at December 31:

In millions of tenge 2019 2018 2017 Corporate income tax Excess profit tax Withholding tax Total Corporate income Excess profit tax Withholding tax Total Corporate income Excess profit tax Withholding tax Total tax tax Deferred tax assets

Property, plant and equipment 34,880 – – 34,880 36,803 (1,916) – 34,887 53,100 (2,214) – 50,886 Tax loss carryforward 556,446 – – 556,446 574,356 – – 574,356 462,368 – – 462,368 Employee related accruals 5,182 82 – 5,264 6,732 – – 6,732 7,017 233 – 7,250 Impairment of financial assets 11 – – 11 8 – – 8 4 – – 4 Environmental liability 4,572 256 – 4,828 4,445 – – 4,445 4,249 217 – 4,466 Other 51,985 3,893 – 55,878 51,583 – – 51,583 40,470 1,345 – 41,815 Less: unrecognized deferred tax assets (532,114) – – (532,114) (536,070) – – (536,070) (443,528) – – (443,528) Less: deferred tax assets offset with deferred tax (50,721) (758) – (51,479) (38,060) – – (38,060) (24,580) – – (24,580) liabilities Deferred tax assets 70,241 3,473 – 73,714 99,797 (1,916) – 97,881 99,100 (419) – 98,681 Deferred tax liabilities

Property, plant and equipment 191,989 7,608 – 199,597 208,108 6,365 – 214,473 153,438 15,712 – 169,150 Undistributed earnings of joint venture – – 356,581 356,581 – – 295,580 295,580 – – 202,963 202,963 Other 4,763 – – 4,763 7,605 – – 7,605 33,205 – – 33,205 Less: deferred tax assets offset with deferred tax (50,721) (758) – (51,479) (38,060) – – (38,060) (24,580) – – (24,580) liabilities Deferred tax liabilities 146,031 6,850 356,581 509,462 177,653 6,365 295,580 479,598 162,063 15,712 202,963 380,738 Net deferred tax liability 75,790 3,377 356,581 435,748 77,856 8,281 295,580 381,717 62,963 16,131 202,963 282,057

The movements in the deferred tax liability/ (asset) were as follows:

In millions of tenge 2019 2018 2017 Corporate Excess Withhol-ding Total Corporate Excess Withhol-ding tax Total Corporate Excess profit tax Withhol-ding tax Total income tax profit tax tax income tax profit tax income tax Net deferred tax liability as at January 1 77,856 8,281 295,580 381,717 62,963 16,131 202,963 282,057 40,547 17,407 173,127 231,081 Foreign currency translation 1,112 – (1,240) (128) 4,714 – – 4,714 (120) (1) 1 (120) Tax expense/(income) during the year recognized (1,999) (4,904) 62,241 55,338 10,093 (7,850) 92,617 94,860 22,394 (1,275) 29,835 50,954 in profit and loss Tax (income)/expense during the year recognized in OCI (1,179) – – (1,179) 86 – – 86 142 – – 142

Net deferred tax liability as at December 31 75,790 3,377 356,581 435,748 77,856 8,281 295,580 381,717 62,963 16,131 202,963 282,057

Deferred corporate income tax and excess profit tax are determined with reference to individual subsoil use contracts. Deferred corporate income tax is also determined for activities outside of the scope of subsoil use contracts. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Unrecognized deferred tax asset arising mainly from tax losses carry forward amounted to 532,114 million tenge as at December 31, 2019 (2018: 536,070 million tenge, 2017: 443,528 million tenge).

Tax losses carry forward as at December 31, 2019, 2018 and 2017 in the Republic of Kazakhstan expire for tax purposes after ten years from the date they are incurred.

238 239 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

31. RELATED PARTY DISCLOSURES Joint ventures As at December 31, 2019 due from joint ventures were mainly represented by the loan given to BeineuShymkent Pipelines of 202,669 million tenge (2018: 226,319 million tenge, 2017: 207,557 million tenge), PKOP of 110,172 million tenge (2018: 133,531 million tenge, TERMS AND CONDITIONS OF TRANSACTIONS WITH RELATED PARTIES 2017: 133,676 million tenge), UGL of 48,752 million tenge (2018: 37,669 million tenge, 2017: 28,049 million tenge) and advances paid to TCO for 92,435 million tenge (2018: 56,753 million tenge, 2017: 52,539 million tenge) under crude oil and LPG purchase contract Related party transactions were made on terms agreed between the parties that may not necessarily be at market rates, except (Note 27). for certain regulated services, which are provided based on the tariffs available to related and third parties. Outstanding balances at the year-end are mainly unsecured and interest free and settlement occurs in cash, except as indicated below. The Group Joint ventures recognizes allowances for expected credit losses on amounts owed by related parties. As at December 31, 2019 due to joint ventures were mainly represented by accounts payable to BeineuShymkent Pipelines of 95,908 million tenge (2018: 39,429 million tenge, 2017: 55,131 million tenge) and Asia Gas Pipeline for gas transportation of 39,323 million TRANSACTIONS BALANCES tenge (2018: 23,596 million tenge, 2017: 27,143 million tenge), and accounts payable for gas purchases from KazRosGas for 30,477 million tenge (2018: 50,845 million tenge, 2017: 25,395 million tenge). The following table provides the balances of transactions with related parties as at December 31, 2019, 2018 and 2017:

In millions of tenge Due from related Due to related Cash and deposits Borrowings CASH AND DEPOSITS PLACED WITH RELATED PARTIES parties parties placed with related payable Other state-controlled parties parties to related parties As at December 31, 2019 the cash and deposits placed with related parties are mainly attributable placed deposit by the Company Samruk-Kazyna entities 2019 327,597 6,168 – 52,843 for 500 million US dollars (equivalent to 192,547 million tenge) at market rate. 2018 268,396 3,656 52 – 2017 289,084 1,703 54 – BORROWINGS PAYABLE TO RELATED PARTIES Associates 2019 56,331 3,814 – – Other state-controlled parties 2018 116,670 2,089 – –

2017 154,954 3,748 – – As at December 31, 2019 the borrowings payable to related parties are represented by loans received from DBK by ANPZ, PNHZ and KTG of 269,335 million tenge (loans and bonds payable to DBK 2018: 455,540 million tenge, 2017: 483,749 million tenge) (Note Other state-controlled parties 2019 6,381 712 192,548 269,335 25). 2018 157 8,813 – 455,540

2017 – 8,753 2,676 489,949 PROCEEDS FROM LOANS GIVEN TO RELATED PARTIES Joint ventures 2019 519,351 217,027 – – In 2019 the Group received proceeds from principal and interest redemption of the loan issued to PKOP for 29,949 million tenge 2018 508,260 174,042 – – (2018: 28,110 million tenge, in 2017: 7,392 million tenge), CPC for 12,656 million tenge (2018: 11,609 million tenge, 2017: 9,077 million 2017 556,564 194,182 – – tenge), BeineuShymkent Pipelines for 31,988 million tenge (2018: 12,775 million tenge, 2017: nil), and proceeds from interest on the “Kazakhstan Note” for 47,663 million tenge (2018: 44,822 million tenge, 2017: 35,143 million tenge).

DUE FROM RELATED PARTIES

Samruk-Kazyna entities

As at December 31, 2019 due from Samruk-Kazyna entities is mainly represented by the financial aid provided to Samruk-Kazyna for 307,568 million tenge and bonds of 16,241 million tenge (2018: 244,878 million tenge and 15,315 million tenge, 2017: 259,835 million tenge and 18,342 million tenge) (Note 24).

Associates

As at December 31, 2019 due from associates was mainly represented by the loan to CPC provided by KPV of 8,691 million tenge (2018: 20,682 million tenge, 2017: 27,402 million tenge) and “Kazakhstan Note” of 38,670 million tenge (2018: 89,018 million tenge, 2017: 121,510 million tenge). The “Kazakhstan Note” is the subordinated debt issued by CPC to the Government in exchange for Kazakstani pipeline assets transferred to CPC on May 16, 1997. In 2015, the Government contributed the right to claim payments under "Kazakhstan Note" to the share capital of the Company.

240 241 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

TRANSACTIONS TURNOVER 32. FINANCIAL RISK MANAGEMENT, OBJECTIVES AND POLICIES The following table provides the total amount of transactions, which have been entered into with related parties during 2019, 2018 and 2017: The Group’s principal financial instruments mainly consist of borrowings, loans given, financial guarantees, cash and cash equivalents, bank deposits as well as accounts receivable and accounts payable. The Group is exposed to interest rate risk, foreign In millions of tenge Sales to related Purchases Interest earned Interest incurred currency risk, credit risk and liquidity risk. The Group further monitors the market risk and liquidity risk arising from all financial parties from related from related to related parties instruments. parties parties

Samruk-Kazyna entities 2019 42,250 20,030 24,054 2,841 Market risk 2018 63,951 25,372 23,370 – The Group takes on exposure to market risks. Market risks arise from open positions in interest rate, currency, and securities, all 2017 66,161 29,897 28,365 – of which are exposed to general and specific market movements. The Group manages market risk through periodic estimation Associates 2019 19,565 40,930 8,892 – of potential losses that could arise from adverse changes in market conditions and establishing appropriate margin and collateral 2018 23,150 22,529 9,800 – requirements. The sensitivity analyses in the following sections relate to the position as of December 31, 2019, 2018 and 2017. 2017 9,598 38,648 10,414 – Foreign currency risk Other state-controlled parties 2019 7,149 3,540 1,300 20,728

2018 157 48,882 – 29,748 As a result of significant borrowings and accounts payable denominated in the US dollars, the Group’s consolidated statement 2017 – 2,942 – 25,694 of financial position can be affected significantly by movement in the US dollar / tenge exchange rates. The Group also has transactional currency exposures. Such exposure arises from revenues in the US dollars. The Group has a policy on managing its Joint ventures 2019 307,075 1,511,600 43,324 11,183 foreign currency risk in US dollar by matching US dollar denominated financial assets with US dollar denominated financial liabilities. 2018 321,806 1,487,044 27,264 3,258 The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other 2017 318,155 1,000,164 25,869 10,769 variables held constant, of the Group’s profit before income tax (due to changes in the cash flows of monetary assets and liabilities). The sensitivity of possible the changes in exchange rates for other currencies are not considered due to its insignificance to the consolidated financial results of Group’s operations.

SALES TO RELATED PARTIES In millions of tenge Increase/ (decrease) in tenge to US dollar Effect on profit before tax Joint ventures exchange rate 2019 +12% (291,448) In 2019 sales to joint ventures were mainly represented by transportation and cargo servicing provided to TCO for 64,246 million tenge (2018: 43,896 million tenge, 2017: 44,225 million tenge), transportation charges and oil servicing provided (9%) 218,586 to Mangistaumunaigas for 59,235 million tenge (2018: 56,927 million tenge, 2017: 55,615 million tenge) for 79,281 million tenge (2018: 2018 +14% (260,693) 70,255 million tenge, 2017: 66,949 million tenge, respectively), respectively. (10%) 1 8 6 , 2 0 9

2017 +10% (96,953) PURCHASES FROM RELATED PARTIES (10%) 96,953 Joint ventures

In 2019 purchases from joint ventures were mainly attributable to purchases of crude oil and LPG from TCO to perform the oil Interest rate risk delivery customer contract (Note 27) for 1,131,890 million tenge (2018: 1,132,908 million tenge, 2017: 819,258 million tenge). Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term borrowings with floating interest KEY MANAGEMENT EMPLOYEE COMPENSATION rates. The Group’s policy is to manage its interest rate cost using a mix of fixed and variable rate borrowings. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s Total compensation to key management personnel (members of the Boards of directors and the Management boards) included profit before income tax (through the impact on floating rate borrowings) and equity. There is no significant impact on the Group’s in general and administrative expenses in the accompanying consolidated statement of comprehensive income was equal to 11,399 equity. million tenge, 8,999 million tenge and 9,022 million tenge for the years ended December 31, 2019, 2018 and 2017, respectively. Compensation to key management personnel mainly consists of contractual salary and performance bonus based on operating results.

242 243 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Increase/ decrease in basis points Effect on profit before tax In millions of tenge Rating 1

2019 +0.35 (2,419) Banks Location 2019 2018 2017 2019 2018 2017 LIBOR (0.35) 2,419 BNP Paribas the United – А (positive) BB+ (stable) – 22 162,829 2018 +0.50 (5,618) Kingdom LIBOR (0.15) 1 , 6 8 5 Kazkommertsbank Kazakhstan – – В+ (negative) – 2 78,657 2017 +0.70 (6,776) Other banks 190,560 134,167 256,284

LIBOR (0.08) 763 1,455,341 1,968,091 2,944,229

CREDIT RISK Continued support by the state bodies of the Republic of Kazakhstan is a key assumption in management’s conclusions that no The Group trades only with recognized, creditworthy parties. It is the Group’s policy that all customers who wish to trade additional recognition of expected credit losses are required, and is based on management’s review of all available information on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis at the date of approval of the consolidated financial statements. with the result that the Group’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in Note 14. There are no significant concentrations of credit risk within the Group. LIQUIDITY RISK With respect to credit risks arising on other financial assets of the Group, which comprise cash and cash equivalents, bank deposits, trade accounts receivable, bonds receivable, loans and notes receivable and other financial assets, the Group’s exposure to credit Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its financial risks arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. liabilities. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

Liquidity requirements are monitored on a regular basis and management ensures that sufficient funds are available to meet any The table below shows the balances of major subsidiaries’ cash and cash equivalents, short-term and long-term deposits (Notes 23 and 18) commitments as they arise. held in banks at the reporting date using the Standard and Poor’s credit ratings.

In millions of tenge Rating 1 The table below summarises the maturity profile of the Group’s financial liabilities at December 31, 2019, 2018 and 2017 based on contractual undiscounted payments. Banks Location 2019 2018 2017 2019 2018 2017 Halyk Bank Kazakhstan BB (stable) ВВ (stable) ВВ (stable) 566,642 666,844 622,931 Rabobank the Netherlands А+ (stable) А+ (positive) А+ (positive) 210,252 70,462 81,923 In millions of tenge On demand Due later than Due later than Due later Due after 5 Total 1 National Bank RK Kazakhstan ВВВ- (stable) - - 192,548 – – one month three month than one year years but not later but not later but not later Credit Agricole the United A+ (stable) А+(stable) А+ (positive) 86,993 123,199 – Corporate Kingdom than three than one year than five years months Mizuho Bank Ltd the United А (positive) А (stable) А (stable) 61,014 149,381 373,030 Kingdom As at December 31, 2019

Deutsche Bank the Netherlands ВВВ+ (stable) ВВВ+ (stable) A- (negative) 55,880 124,145 88,991 Borrowings1 68,135 15,905 325,822 1,750,799 4,358,675 6,519,336 Citibank Kazakhstan А+(stable) А+(stable) А+(stable) 44,080 7,031 2,032 Trade accounts payable 255,550 368,492 43,819 – – 667,861 MUFG Bank the United А (positive) А (positive) А (stable) 33,998 218,600 464,530 Financial guarantees2 – 22,082 65,337 318,978 626 407,023 (Bank of Tokyo- Kingdom Mitsubishi UFJ) Lease liabilities 4,922 204 5 , 7 9 5 26,026 10,419 47,366 ING Bank the Netherlands А+(stable) А+ (stable) А+ (stable) 10,331 23,690 170,385 Other financial liabilities 13,249 8,391 8,570 8,207 1,901 40,318 HSBC АA- (negative) АА- (stable) АА- (stable) 2,991 2,450 113,090 341,856 415,074 449,343 2,104,010 4,371,621 7,681,904

Societe Generale Switzerland А (positive) А (positive) А (stable) 52 189 164,779 As at December 31, 2018 Societe Generale the United – А (positive) А (stable) – 149,326 314,734 Borrowings1 121,164 49,988 335,828 1,837,612 4,624,005 6,968,597 Kingdom Trade accounts payable 269,538 352,008 11,193 – – 632,739 Citibank the United Arab – А+(stable) А+(stable) – 149,293 50,034 Emirates Financial guarantees2 – 4,205 11,655 168,548 183,076 367,484 Sumitomo the United – А (positive) А (positive) – 149,290 – Lease liabilities 1,157 194 1,530 6,866 35 9,782 Mitsui Banking Kingdom Corporation Other financial liabilities 11,012 14,530 17,772 – – 43,314 402,871 420,925 377,978 2,013,026 4,807,116 8,021,916

1. The Group excludes from the maturity profile table the loans payable to project partners under the carry-in financing agreements (Note 25), due to the uncertainty of maturity of these loans. 2. The Group includes financial guarantees to the maturity profile table, however, the cash outflow in relation to financial guarantees is subject to certain conditions. Financial guarantee is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because of specified debtor fails to make payment when due in accordance with the original or modified terms of debt instrument. In 2017, 2018 and 2019 there was no instances of financial guarantees 1. The Group excludes from the maturity profile table the loans payable to project partners under the carry-in financing agreements (Note 25), due to the uncertainty execution. of maturity of these loans.

244 245 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge On demand Due later than Due later than Due later Due after 5 Total In millions of tenge 2019 2018 2017 one month three month than one year years1 but not later but not later but not later Borrowings 3,837,504 4,153,238 4,301,252 than three than one year than five years less: cash and short term bank deposits 1,423,956 1,925,912 2,902,928 months Net debt 2,413,548 2,227,326 1,398,324 As at December 31, 2017 Equity 8,196,656 7,143,069 6,783,605

Borrowings1 78,839 51,491 942,639 2,218,917 2,649,616 5,941,502 Capital and net debt 10,610,204 9,370,395 8,181,929 Trade accounts payable 249,845 177,151 86,855 – – 513,851 No changes were made in the overall strategy, objectives, policies or processes for managing capital during the years ended Financial guarantees2 – 4,488 13,465 105,156 190,656 313,765 December 31, 2017, 2018 and 2019. Lease liabilities 176 101 1,641 5,597 142 7,657 Other financial liabilities 5,260 20,201 4,183 – – 29,644 334,120 253,432 1,048,783 2,329,670 2,840,414 6,806,419 FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENT PROPERTY

The fair value of bonds receivable from the Samruk-Kazyna and other debt instruments have been calculated by discounting CAPITAL MANAGEMENT the expected future cash flows at market interest rates.

The primary objective of the Group’s capital management is to maximise the shareholder value. The Group manages its All financial instruments for which fair value is recognized or disclosed are categorized within the fair value hierarchy, based capital to ensure that Group will be able to continue as a going concern while maximising the return to stakeholders through on the lowest level input that is significant to the fair value measurement as a whole, as follows: the optimisation of the debt and equity balance. Level 1 – quoted (unadjusted) market prices in active markets for identical assets or liabilities; The Company seeks to maintain a prudent capital structure to support its capital investment plans and maintain investment grade credit rating through the cycle. Maintaining sufficient financial flexibility is considered strategically important to mitigate industry Level 2 – valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly cyclicality while also enabling the pursuit of organic and inorganic investment opportunities. observable;

The Company has a comprehensive and disciplined internal approval process for capital expenditures, new projects and debt Level 3 – valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. incurrence. There were no transfers between Level 1 and Level 2 during the reporting period, and no transfers into or out of Level 3 the fair For the purpose of the Group’s capital management, the capital structure of the Group consists of borrowings disclosed in Note value measurement. 25 less cash and short-term deposits and equity, comprising share capital, additional paid-in capital, other reserves and retained earnings as disclosed in Note 24. For assets and liabilities that are recognized at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair The Group’s management regularly reviews the capital structure. As part of this review, management considers the cost of capital value measurement as a whole) at the end of each reporting period. There were no changes in the Group’s valuation processes, and the risks associated with each class of capital. Also to achieve this overall objective, the Group’s capital management, among valuation techniques, and types of inputs used in the fair value measurements during the year. other things, aims to ensure that it meets financial covenants attached to borrowings that define capital structure requirements. There have been no breaches of the financial covenants of any borrowing in the years ended December 31, 2017, 2018 and 2019 (Note 25).

The carrying amount of the Group financial instruments as at December 31, 2019, 2018 and 2017 are reasonable approximation of their fair value, except for the financial instruments disclosed below:

In millions of tenge 2019 2018 2017

Carrying amount Fair value Fair value by level of assessment Carrying amount Fair value Fair value by level of assessment Carrying Fair value Fair value by level of assessment amount Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Bonds receivable 16,241 18,835 – 18,835 – 15,315 20,444 – 20,444 – 18,342 21,807 – 21,807 – from Samruk-Kazyna Debts issued to related parties 510,002 506,868 – 304,422 202,446 491,955 484,657 – 245,278 239,379 785,593 791,667 – 264,078 527,589 at amortised cost and lease receivable from a joint venture Fixed interest rate borrowings 3,146,477 3,576,082 3,172,400 403,682 – 3,029,688 2,972,627 2,726,332 246,295 – 3,137,182 3,230,352 2,996,478 233,874 –

Floating interest rate borrowings 691,027 714,271 – 714,271 – 1,123,550 1,153,454 – 1,153,454 – 1,164,070 1,186,192 – 1,186,192 –

1. The Group excludes from the maturity profile table the loans payable to project partners under the carry-in financing agreements (Note 25), due to the uncertainty of maturity of these loans. 2. The Group includes financial guarantees to the maturity profile table, however, the cash outflow in relation to financial guarantees is subject to certain conditions. Financial guarantee is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because of specified debtor fails to make payment when due in accordance with the original or modified terms of debt instrument. In 2017, 2018 and 2019 there was no instances of financial guarantees execution.

246 247 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

33. CONSOLIDATION

The following direct significant subsidiaries have been included in these consolidated financial statements: TAXATION

Significant entities Main activity Country of Percentage ownership Kazakhstan’s tax legislation and regulations are subject to ongoing changes and varying interpretations. Instances of inconsistent incorporation 2018 2017 opinions between local, regional and national tax authorities are not unusual, including opinions with respect to IFRS treatment of revenues, expenses and other items in the financial statements. The current regime of penalties and interest related to reported KazMunayGas Exploration Production JSC Exploration and production Kazakhstan 99.70% 99.50% 63.01% and discovered violations of Kazakhstan’s tax laws are severe. Due to uncertainties associated with Kazakhstan’s tax system, KazMunayTeniz LLP Exploration and production Kazakhstan 100.00% 100.00% 100.00% the ultimate amount of taxes, penalties and interest, if any, may be in excess of the amount expensed to date and accrued KMG Karachaganak LLP Exploration and production Kazakhstan 100.00% 100.00% 100.00% at December 31, 2019. KazTransOil JSC Oil transportation Kazakhstan 90.00% 90.00% 90.00% As at December 31, 2019, Management believes that its interpretation of the relevant legislation is appropriate and that it is probable KazMorTransFlot LLP Oil transportation Kazakhstan 100.00% 100.00% 100.00% that the Group’s tax positions will be sustained, except as provided for or otherwise disclosed in these consolidated financial and construction statements. KazTransGas JSC Gas transportation Kazakhstan 100.00% 100.00% 100.00% Cooperative KazMunayGas PKI U.A. Переработка и реализа- Нидерланды 100,00 % 100,00 % 100,00 % ция нефтепродуктов TRANSFER PRICING CONTROL Refinery and marketing Netherlands 100.00% 100.00% 100.00% of oil products Transfer pricing control in Kazakhstan has a very wide scope and applies to many transactions that directly or indirectly relate to international business regardless of whether the transaction participants are related or not. The transfer pricing legislation requires that all taxes applicable to transaction participants are related or not. The transfer pricing legislation requires that all taxes Atyrau Refinery LLP Refinery Kazakhstan 99.53% 99.53% 99.53% applicable to a transaction should be calculated based on market price determined in accordance with the arm’s length principle. Pavlodar oil chemistry refinery LLP Refinery Kazakhstan 100.00% 100.00% 100.00% The law on transfer pricing came into force in Kazakhstan from January 1, 2009. The law is not explicit and there is little precedence KMG International N.V. Refinery and marketing Romania 100.00% 100.00% 100.00% with some of its provisions. Moreover, the law is not supported by detailed guidance, which is still under development. As a result, of oil products application of transfer pricing control to various types of transactions is not clearly regulated. Because of the uncertainties KazMunayGas Onimdery LLP Marketing of oil products Kazakhstan 100.00% 100.00% 100.00% associated with the Kazakhstan transfer pricing legislation, there is a risk that the tax authorities may take a position that differs from the Group’s position, which could result in additional taxes, fines and interest at December 31, 2019. As at December 31, 2019 KazMunayGas-Service LLP Service projects Kazakhstan 100.00% 100.00% 100.00% management believes that its interpretation of the transfer pricing legislation is appropriate and that it is probable that the Group’s KMG Drilling&Services LLP Drilling services Kazakhstan 100.00% 100.00% 100.00% positions with regard to transfer pricing will be sustained.

ENVIRONMENTAL AUDIT AT JSC “EMBAMUNAIGAS” (EMBAMUNAIGAS)

Since 2018 Embamunaigas, the Group subsidiary, has been subject to three ecological audits for the periods from November 2017 to December 2018. During 2018 Embamunaigas accrued 34,213 million and paid-off in total 8,143 million tenge. As a result, 34. CONTINGENT LIABILITIES AND COMMITMENTS the provision as of December 31, 2018 amounted to 26,070 million tenge in the consolidated financial statements for 2018.

During 2019 to avoid late payment penalties, Embamunaigas paid-off 6,472 million tenge. In the meantime, in 2019, the court ruled to decrease the amount of fines, and accordingly Embamunaigas reversed 25,433 million tenge, net, and filed tax return to offset OPERATING ENVIRONMENT earlier recognized provision of 10,420 million tenge as prepayment for other taxes. As a result, the provision amounted to 4,585 million tenge as at December 31, 2019. Kazakhstan continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Kazakhstan economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

COMMODITY PRICE RISK

The Group generates most of its revenue from the sale of commodities, primarily crude oil and oil products. Historically, the prices of these products have been volatile and have fluctuated widely in response to changes in supply and demand, market uncertainty, the performance of the global or regional economies and cyclicality in industries.

Prices may also be affected by government actions, including the imposition of tariffs and import duties, speculative trades, an increase in capacity or an oversupply of the Group’s products in its main markets. These external factors and the volatility of the commodity markets make it difficult to estimate future prices.

A substantial or extended decline in commodity prices would materially and adversely affect the Group’s business and the consolidated financial results and cash flows of operations. The Group does not hedge significantly its exposure to the risk of fluctuations in the price of its products.

248 249 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

LEGAL ISSUES AND CLAIMS In addition, from August 20, 2014 to the present, the Ministry of Energy of the Republic of Kazakhstan (MinEnergy) quarterly notifies the Contracting Companies, participants of FPSA, (Contracting Companies) of disagreement regarding the presented calculation KMG DRILLING & SERVICES LLP (KMG DS) LITIGATIONS WITH CONSORTIUM OF COMPANIES ERSAI CASPIAN CONTRACTOR LLP of the proportion of the profit oil sharing. AND CASPIAN OFFSHORE AND MARINE CONSTRUCTION LLP KMG DS, the subsidiary of the Group, was involved in arbitration proceedings with the Consortium of Ersai Caspian Contractor On December 30, 2016, a legally non-binding Memorandum of Understanding was signed between the Republic of Kazakhstan LLP and Caspian Offshore & Marine Construction Kazakhstan LLP (further - “Consortium” or “Plaintiff”) on the issues arising and the Contracting Companies. from the contract for the purchase of integrated works on construction of a jack-up floating drilling rig dated 5 July 2012. The initial claim amounted to 192 million US dollars (equivalent to 73,501 million tenge) and was under arbitration of the London Court On September 29, 2017 the competent authority represented by PSA LLP, filed a request for arbitration in the name of International Arbitration (LCIA). The claim components were as follows: of the Contracting Companies (with the exception of KMG Karachaganak LLP) on the improper calculation of the Fairness Index. KMG • Compensation related to the increase in the cost of the contract (deficiencies in the project documentation and changes Karachaganak LLP (KMG Karachaganak) was not involved in the arbitration process due to a conflict of interest. in the design solution) of 140,118 thousand US dollars (equivalent to 53,833 million tenge); • A penalty of 1,383 thousand US dollars (equivalent to 531 million tenge); On October 1, 2018, the Contracting Companies entered into a non-legally binding Agreement on Principles (hereinafter referred • The amount of claims for currency adjustment of 50,613 thousand US dollars (equivalent to 19,446 million tenge). to as the “AOP”). On June 17, 2019 the MinEnergy sent a letter to the Contracting Companies that the regulations based on AOP is not acceptable to the MinEnergy. Also MinEnergy promulgated that it is open for new discussions that are to be based on revised The Plaintiffs indicated a possible change in this amount at the date of payment of the claim. mechanisms of the objectivity Index.

On April 11, 2018, after negotiations the Consortium reduced the initial claim amount and reduced it to 140 million dollars In September 2019 in Arbitrage (Paris) the hearings took place, and the final decision is expected in 2020. (equivalent to 54.3 billion tenge). There was uncertainty regarding the result of the resolution, as such, as at December 31, 2018 and 2017 the Group did not recognize any provision on this case. During 2019, KMG DS has filed a counter claim against Currently, the Republic of Kazakhstan and the Contracting Companies are negotiating the conclusion of a legally binding Settlement the Consortium. Agreement.

On November 8, 2019, the Group sent a notification to LCIA to suspend the proceedings as parties decided to resolve the dispute KMG Karachaganak, together with the KMG and the competent authority represented by PSA LLP, prepared comments by peaceful means. on the draft AOP between the Contracting Companies and the Republic of Kazakhstan, relating to exclusion of KMG Karachaganak from participating in the payment of compensation. In the opinion of the Group’s Management, it is highly probable that KMG As of December 31, 2019 in accordance with the legal advice and existing international practices, the Group accrued a provision Karachaganak will be excluded from participation in the payment of compensation. Accordingly, no provisions have been made of 90,000 thousand US dollars (equivalent to 34,132 million tenge at the exchange rate for December 31, 2019) in the general under the terms of the AOP in these consolidated financial statements. and administrative expenses (Note 12) in the statement of comprehensive income. As of the date of the issue of the consolidated financial statements the negotiations were under way with the Consortium. COST RECOVERY AUDITS CIVIL LITIGATION (KMG I) According to a Decree issued April 22, 2016, Prosecutor’s Office of Romania with the General Headquarters of the Department Under the base principles of the production sharing agreements, the Government transferred to contractors the exclusive rights for Fight Against Organized Crime and Terrorism (DIICOT) investigated the case against 26 suspects under charges of organized to conduct activities in the subsurface use area, but did not transfer rights to this subsurface use area either to ownership or lease. crime (14 of them were employees of KMGI). Thus, all extracted and processed oil (i.е. the hydrocarbons produced) are the property of the Government. Works are carried out on the basis of compensation and the Government pays to the contractors not in cash but in the form of the portion of oil On July 22, 2016 the Company and KMG I submitted to the Romanian authorities the Notice of Investment Dispute based production, thereby allowing the contractors to recover their costs and earn profit. on the Agreement between the Government of Romania and the Government of the Republic of Kazakhstan, the Agreement between the Government of the Kingdom of the Netherlands and the Government of Romania and the Energy Charter Treaty. In accordance with the production sharing agreements not all costs incurred by the contractors could be reimbursed. Certain Based on the results of the negotiations, in February 2013, a Memorandum of Understanding was signed between the Government expenditures need to be approved by the authorized bodies. The authorized bodies conduct the cost recovery audits. In accordance of Romania and KMG I. with the costs recovery audits completed prior to December 31, 2019 certain amounts of the costs incurred by contractors were assessed as non-recoverable. The parties to the production sharing agreements are in negotiations with respect On December 5, 2019 Prosecutor’s Office of Romania issued another Ordinance according to which the criminal charges were to the recoverability of those costs. dismissed because the statute of limitations expired. The same decree lifted all seizures on Rompetrol Rafinare S.A. assets imposed in 2016, with the exception of a number of production facilities at Petromidia Refinery to provide for potential claims of US Dollars As of December 31, 2019 the Group’s share in the total disputed amounts of costs is 402,474 million tenge (2018: 382,594 million 106.5 million US dollars. tenge, 2017: 242,915 million tenge). The Group and its partners under the production sharing agreements are in negotiation with the Government with respect to the recoverability of these costs. On December 27, 2019 KMG I challenged the Ordinance and requires the case to be dismissed on merits, but statute of limitations expired. KAZAKHSTAN LOCAL MARKET OBLIGATION A complaint was filed by 3 plaintiffs on the decision of the Romanian Prosecutor's Office: 1) The Romanian Privatization Agency regarding the improper fulfillment by KMGI of the post-privatization requirements for the obligations of Petromidia Refinery The Government requires oil companies in the Republic of Kazakhstan to supply a portion of the products to meet the Kazakhstan and Vega Refinery in 2013-2014 in the amount of 30 million US dollars; 2) Faber Invest & Trade Inc., the non-controlling shareholder domestic energy requirement on an annual basis, mainly to maintain oil products supply balance on the local market and to support of KMG I subsidiaries, in challenging a number of decisions of KMGI as a shareholder of Rompetrol Rafinare S.A. at that time, agricultural producers during the spring and autumn sowing and harvest campaigns. in the amount of 55 million US dollars in criminal and civil cases; 3) Mr. Stephenson George Philip, the former director of KMG I, in criminal and civil matters. As of the date of these consolidated financial statements for the year ended 31 December 2019, Kazakhstan local market oil prices are significantly lower than export prices and even lower than the normal domestic market the Group did not receive any communication from the court. prices determined in an arm-length transaction. If the Government does require additional crude oil to be delivered over and above the quantities currently supplied by the Group, such supplies will take precedence over market sales and will generate substantially DISPUTES REGARDING THE CALCULATION OF THE PROPORTION OF PROFIT OIL SHARING WITH THE REPUBLIC OF KAZAKHSTAN (KMG less revenue than crude oil sold on the export market, which may materially and adversely affect the Group’s business, prospects, KARACHAGANAK LLP) consolidated financial position and results of operations. According to the Karachaganak Final Production Sharing Agreement (FPSA), the Karachaganak project profit oil sharing is regulated by the Fairness Index. In the second quarter of 2014, the economics of the Karachaganak project reached a level where the trigger In 2019, in accordance with its obligations, the Group delivered 6,223,752 tons of crude oil (2018: 6,224,344 tons, 2017: 5,407,526 on the Fairness Index “worked” and the proportion in the profit oil sharing changed in favour of the Republic of Kazakhstan. tons), including joint ventures, to the Kazakhstan market.

250 251 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

COMMITMENTS UNDER SUBSOIL USE CONTRACTS 35. SEGMENT REPORTING As at December 31, 2019 the Group had the following commitments related to minimal working program in accordance with terms of licenses, production sharing agreements and subsoil use contracts, signed with the Government: The Group’s operating segments have their own structure and management according to the type of the produced goods and services provided. Moreover, all segments are strategic directions of the business which offer different types of the goods and services in different markets. The functions have been defined as the operating segments of the Group because they Year Capital expenditures Operational expenditures are segments a) that engages in business activities from which revenues are generated and expenses incurred; b) whose operating 2020 212,288 42,733 results are regularly reviewed by the Group’s chief operating decision makers to make decisions. The Group’s activity consists of four main operating segments: exploration and production of oil and gas, oil transportation, gas trading and transportation, 2021 10,829 3,693 refining and trading of crude oil and refined products. The Group presents KMG's activities separately, since KMG performs not only 2022 9,389 3,410 the functions of the parent company, but also carries out operational activities. The remaining operating segments have been 2023-2048 8,697 25,762 aggregated and presented as other operating segment due to their insignificance. Total 241,203 75,598 Disaggregation of revenue by types of goods and services is presented in Note 6 to the financial statements.

OIL SUPPLY COMMITMENTS Disaggregated revenue type Sales of crude oil and gas mainly represents sales made by the following operating segments: Gas trading and transportation of 874,505 million tenge (2018: 769,549 million tenge, 2017: 360,510 million tenge) and Refining As of December 31, 2019 the Group had commitments under the oil supply agreements in the total amount of 12.8 million ton (as and trading of crude oil and refined products of 3,092,437 million tenge (2018: 3,324,462 million tenge, 2017: 2,316,592 million at December 31, 2018: 22.6 million ton and December 31, 2017: 28.7 million ton), including commitments of joint venture. tenge).

Disaggregated revenue type Sales of refined products mainly includes revenue of operating segments such as Refining and trading OTHER CONTRACTUAL COMMITMENTS of crude oil and refined products of 1,665,356 million tenge (2018: 2,023,166 million tenge, 2017: 1,305,148 million tenge), Sales of crude oil and gas of 4,166 million tenge (2018: 87,344 million tenge, 2017: 116,392 million tenge) and Corporate of 352,056 million As at December 31, 2019, the Group, including joint ventures, had other capital commitments of approximately 335,609 million tenge tenge (2018: 64,516 million tenge, 2017: nil). (as at December 31, 2018: 620,057 million tenge and 2017: 501,752 million tenge), related to acquisition and construction of property, plant and equipment. Segment performance is evaluated based on revenues, net profit and EBITDA, which are measure on the same basis as in the consolidated financial statements. As at December 31, 2019, the Group had commitments in the total amount of 78,677 million tenge (as at December 31, 2018: 114,380 million tenge and 2017: 142,406 million tenge) under the investment programs approved by the joint order of Ministry of Energy EBITDA is a supplemental non-IFRS financial measure used by management to evaluate segments performance, and is defined of RK and Committee on Regulation of Natural Monopolies and Protection of Competition of the Ministry of National Economy of RK as earnings before depreciation, depletion and amortization, finance income and expense, income tax expense. and aimed at capital construction/reconstruction/overhaul/diagnostic of production facilities. EBITDA, % is calculated as EBITDA of each reporting segment divided by the total EBITDA.

NON-FINANCIAL GUARANTEES Eliminations represent the exclusion of intra-group turnovers. Inter-segment transactions were made on terms agreed to between the segments that may not necessarily be at market rates, except for certain regulated services, which are provided based As of December 31, 2019, 2018 and 2017, the Group has outstanding performance guarantees issued in favour of third parties on the tariffs available to related and third parties. whereas it provides guarantee should its subsidiary, joint venture or associate fail to perform their obligations under the natural gas purchase-sale, transportation and other agreements.

As of the reporting date the management of the Group believes that there were no cases of non-performance from the guaranteed parties and, accordingly, no obligations related to the above stated non-financial contingencies were recognized.

252 253 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

The Group’s property, plant and equipment are located in the following countries: In millions of tenge Exploration Oil Gas trading Refining Corporate Other Elimination Total and transportation and transpor- and trading In millions of tenge 2019 2018 2017 production tation of crude oil of oil and gas and refined Kazakhstan 3,751,128 3,644,969 3,276,567 products Other countries 733,143 870,201 803,598 Other segment 4,484,271 4,515,170 4,080,165 information Investments 4,788,314 384,173 350,732 40,304 – 26,861 – 5,590,384 in joint ventures and associates Capital expenditures 256,725 44,926 91,744 79,492 14,323 18,098 – 505,308 The following represents information about profit and loss, and assets and liabilities of operating segments of the Group for 2019: Allowances (3,146) (5,173) (9,991) (46,020) (22,297) (9,903) – (96,530) for obsolete inventories, expected credit In millions of tenge Exploration Oil Gas trading Refining Corporate Other Elimination Total losses on accounts and transportation and transpor- and trading receivable, production tation of crude oil impairment of advances paid of oil and gas and refined and other assets products Assets 7,504,518 1,080,046 2,195,386 2,854,018 1,480,009 454,084 (1,486,146) 14,081,915 Revenues 7,592 236,485 1,102,110 5,035,188 352,056 125,425 – 6,858,856 of the segment from sales to external customers Liabilities 748,226 204,540 956,917 1,771,290 3,453,634 117,899 (1,367,247) 5,885,259 of the segment Revenues from sales 1,302,744 100,253 965 540,947 78,121 87,505 (2,110,535) – to other segments Total revenue 1,310,336 336,738 1,103,075 5,576,135 430,177 212,930 (2,110,535) 6,858,856 Cost of purchased (33,719) (13,666) (490,142) (4,972,915) (212,655) (33,252) 1,842,605 (3,913,744) oil, gas, petroleum products and other The following represents information about profit and loss, and assets and liabilities of operating segments of the Group for 2018: materials Production expenses (295,687) (149,033) (71,978) (203,864) (110,379) (145,595) 254,843 (721,693) In millions of tenge Exploration Oil Gas trading Refining Corporate Other Elimination Total Taxes other than (379,725) (13,287) (17,388) (13,584) (22,417) (7,894) – (454,295) and transportation and transpor- and trading income tax production tation of crude oil Transportation (123,725) (1,145) (272,174) (69,264) (7,137) (3) 53,046 (420,402) of oil and gas and refined and selling expenses products General (15,439) (15,877) (35,900) (45,247) (35,244) (71,175) 4,915 (213,967) Revenues 172,462 213,175 920,096 5,599,857 64,516 18,858 – 6,988,964 and administrative from sales to external expenses customers Share in profit 500,737 75,474 242,336 (3,248) – 12,680 – 827,979 Revenues 1,293,946 55,229 1,083 1,295,002 117,561 14,642 (2,777,463) – of joint ventures from sales to other and associates, net segments EBITDA 962,778 219,204 457,829 268,013 42,345 (32,309) 44,874 1,962,734 Total revenue 1,466,408 268,404 921,179 6,894,859 182,077 33,500 (2,777,463) 6,988,964 EBITDA, % 49% 11% 23% 14% 2% -2% 2% Cost of purchased (44,174) (13,989) (323,205) (6,357,110) (88,546) (969) 2,515,035 (4,312,958) oil, gas, petroleum Depreciation, (94,432) (39,257) (41,567) (143,875) (4,177) (14,116) – (337,424) products and other depletion materials and amortization Production (400,495) (100,404) (67,197) (142,099) (46,179) 166,898 (604,475) Finance income 202,592 7,298 29,589 43,975 130,878 10,729 (184,181) 240,880 expenses (14,999) Finance costs (21,460) (7,095) (43,443) (127,391) (264,841) (8,333) 155,130 (317,433) Taxes other than (427,838) (12,592) (16,069) (6,922) (12,772) (1,539) – (477,732) Impairment (63,618) (24,783) 816 (93,161) (11) (27,062) – (207,819) income tax of property, plant Transportation (112,798) (194) (220,792) (80,500) (3,491) (4) 47,002 (370,777) and equipment, and selling intangible assets, expenses exploration and evaluation General (97,234) (17,300) (17,296) (50,465) (24,051) (5,111) (2,028) (213,485) assets and administrative expenses Income tax expenses (138,762) (20,825) (39,917) (12,241) (12,923) (1,512) – (226,180) Share in profit 616,607 60,099 22,003 (3,113) – 1,730 – 697,326 Net profit 842,496 136,906 362,344 (36,553) (119,657) (68,083) 41,004 1,158,457 of joint ventures for the year and associates, net EBITDA 1,000,476 184,024 298,623 254,650 7,038 12,608 (50,556) 1,706,863

254 255 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Exploration Oil Gas trading Refining Corporate Other Elimination Total Inter-segment transactions were made on terms agreed to between the segments that may not necessarily be at market rates, except and transportation and transpor- and trading for certain regulated services, which are provided based on the tariffs available to related and third parties. The following represents production tation of crude oil information about profit and loss, and assets and liabilities of operating segments of the Group for 2017: of oil and gas and refined products EBITDA, % 59% 11% 17% 15% 0% 1% -3% In millions of tenge Exploration Oil Gas trading Refining Corporate Other Elimination Total and transpor- and transpor- and trading Depreciation, (82,193) (36,844) (35,290) (121,863) (2,314) (6,682) – (285,186) production tation tation of crude of oil and refined and amortization and gas products Finance income 40,896 4,712 15,351 49,318 222,092 787 (172,129) 161,027 Revenues 195,262 194,815 522,205 3,860,502 – 20,979 – 4,793,763 Finance costs (53,296) (5,366) (41,938) (115,805) (345,705) (7,356) 141,811 (427,655) from sales to external customers Impairment (41,371) (6,754) (4,091) (45,183) (67,120) (1,003) – (165,522) of property, plant Revenues 1,007,989 50,140 30,383 767,364 – 18,051 (1,873,927) – and equipment, from sales intangible assets, to other segments exploration and evaluation Total revenue 1,203,251 244,955 552,588 4,627,866 – 39,030 (1,873,927) 4,793,763 assets Cost of purchased (40,632) (12,746) (237,794) (4,161,621) – (3,179) 1,726,458 (2,729,514) Income tax (200,787) (22,361) (47,039) 8,652 (17,239) (486) – (279,260) oil, gas, petroleum expenses products and other Net profit 721,376 122,986 183,548 (91,735) (175,820) (1,161) (65,683) 693,511 materials for the year Production (394,524) (91,671) (57,113) (143,663) – (18,341) 80,966 (624,346) Other segment expenses information Taxes other than (320,646) (11,993) (12,763) (6,174) (981) (1,890) – (354,447) Investments 4,421,783 304,880 100,631 65,341 2 2,807 – 4,895,444 income tax in joint ventures Transportation (115,636) (40) (91,632) (73,385) – (8) 42,638 (238,063) and associates and selling Capital 180,033 65,106 156,897 203,702 18,337 4,000 – 628,075 expenses expenditures General (50,236) (15,900) (17,996) (55,681) (56,471) (6,226) 38,730 (163,780) Allowances (5,465) (4,240) (8,805) (64,773) (20,330) 162 – (103,451) and administrative for obsolete expenses inventories, Share in profit 338,262 56,664 7,989 10,724 – 1,311 – 414,950 expected credit of joint ventures losses on accounts and associates, receivable, net impairment of advances paid EBITDA 619,839 169,269 143,279 198,066 (57,452) 10,697 14,865 1,098,563 and other assets EBITDA, % 56% 15% 13% 18% -5% 1% 1% Assets 7,295,234 1,021,946 1,820,133 3,995,798 1,913,427 157,461 (2,188,719) 14,015,280 of the segment Depreciation, (71,871) (31,047) (30,457) (94,116) (1,926) (8,604) – (238,021) depletion Liabilities 804,279 210,930 950,954 2,761,676 4,121,330 73,125 (2,050,083) 6,872,211 and amortization of the segment Finance income 31,641 6,892 15,710 53,196 115,879 953 (101,697) 122,574 Finance costs (17,035) (5,242) (35,846) (99,973) (216,856) (6,770) 75,367 (306,355) Impairment (8,679) (52) (327) (14,357) 41 (1,286) – (24,660) of property, plant and equipment, intangible assets, exploration and evaluation assets Income tax (108,415) (18,928) (24,678) (16,182) (22,001) (81) – (190,285) expenses Net profit 441,202 121,923 79,625 26,066 (125,952) (8,474) (8,942) 525,448 for the year

256 257 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

In millions of tenge Exploration Oil Gas trading Refining Corporate Other Elimination Total and transpor- and transpor- and trading 36. SUBSEQUENT EVENTS production tation tation of crude oil of oil and refined Receipt of residual of proceeds from sale of the subsidiary and gas products On January 14, 2020, the Public Foundation “Nursultan Nazarbayev Education Fund”, the purchaser, paid the second tranche of 4,659 Other segment information million tenge for 35% out of remaining 70% stake in KBTU (Note 5).

Investments 3,503,951 208,107 52,562 54,660 1 4,349 – 3,823,630 Dividends received from joint ventures in joint ventures and associates On January 8, 2020, the Company received dividends from Kazakhoil-Aktobe LLP, the JV, of 5,000 million tenge. Capital 145,761 74,817 140,487 291,487 12,638 3,451 – 668,641 expenditures Non-adjusting event after the reporting period Allowances (5,919) (3,557) (9,232) (106,994) (15,765) 3,360 – (138,107) for obsolete inventories, The outbreak of novel coronavirus continues to spread throughout China and to countries across the world. The Group will closely expected credit monitor the evolving coronavirus situation, yet an estimate of its financial effect cannot be made at this stage. losses on accounts receivable, Proceeds and repayment of borrowings: impairment of advances paid and other assets ANPZ, the subsidiary of the Group: Assets 6,654,733 890,320 1,444,620 3,845,701 2,146,055 167,501 (1,598,972) 13,549,958 On January 15, 2020, received a borrowing from DBK for the total amount of 46,062 million tenge with the interest rate of 7.99% of the segment p.a. to finance the project on construction of the Deep oil refining complex. The borrowing repayment starts in June 2020 on semi- Liabilities 661,481 184,961 760,480 2,751,116 3,828,741 83,827 (1,504,253) 6,766,353 annual basis. of the segment

On January 16, 2020, performed planned and early redemption of principal, interest and early redemption commission of the borrowings obtained from Eximbank for the total of 205 million US Dollars (equivalent 77,911 million tenge at repayment dates).

On January 21, 2020, redeemed principal and interest of the borrowings obtained from DBK for 17,998 million tenge.

In January and February 2020 partly redeemed principal and interest of the borrowings obtained from Halyk Bank for 57 million US Dollars (equivalent 21,650 million tenge at repayment dates).

258 259 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

APPENDIX 1 REFERENCE PROVISIONS EXTENT COMMENTS TO THE CODE OF THE CODE OF COMPLIANCE

2 Item 14 Boards complies As per recommendations made by the independent consultant REPORT ON COMPLIANCE OF THE CORPORATE GOVERNANCE CODE 2019 of Chapter 1 of Directors of the Fund partially following the diagnostics of corporate governance of KMG, a revised of Section 2 and Organizations Code of Business Ethics has been developed and approved (resolution should make sure of the Board of Directors adopted on 29 November 2018). This Report on compliance / non-compliance with the principles and provisions of the Corporate Governance Code (the "Code") that business A statement has been disseminated among all officers and employees of KMG (approved by resolution of the Sole Shareholder of KMG on 27 May 2015) has been developed in furtherance of item ethics standards of KMG for them to look through the Code of Business Ethics and sign 6 of the Code, and covers information on KMG’s compliance / non-compliance with the principles and provisions of the Code. are implemented off a statement to acknowledge that they have read and understood In general, at year-end 2019, KMG was in compliance with most of the provisions and principles of the Code, except for the following and observed. All the Code. officers and employees Training on the new Code of Business Ethics started in 4Q2019 aspects: of the Fund to further clarify the provisions of the Code. Six internal trainers and the Organizations of KMG, including the KMG Ombudsman, were trained for further must acknowledge training of KMG employees. Further training by internal trainers REFERENCE PROVISIONS EXTENT COMMENTS that they have read of KMG is planned for 2020. TO THE CODE OF THE CODE OF COMPLIANCE and understood To date, KMG has not implemented the practice of employees the Code of Business regularly confirming their knowledge of this Code. Ethics by signing GOVERNMENT the acknowledgement 1 Item 2 It is recommended complies In December 2015, the Kazakhstan Government approved form and by regularly of Chapter 1 to make sure partially a Comprehensive Privatisation Plan for 2016-2020 incorporating reaffirming their knowledge of Section 2 the optimal asset 73 KMG Group companies. Under the privatisation and divestment of the Code. structure is in place programmes, the number of legal entities in the KMG Group is being THE FUND AND ITS ORGANISATIONS for Organizations within reduced. the Fund. In a Holding Also, work is underway to simplify the asset structure 3 Item 3 Boards of Directors complies Pursuant to item 4 of the KMG Charter, KMG's financial and Company, a parent of the KMG Group, including through the liquidation/reorganization of Chapter 2 of the Companies shall partially production activities are carried out based on economic company may be of subholdings. In 2019, measures were taken to merge a KMG's of Section 2 be fully independent independence; pursuant to item 13 of the KMG Charter, KMG's established in the form subholding KazMunaiGas Exploration Production into KMG. in decision- objective is to generate net income from independent economic of a stock company. KMG assets sold/liquidated in 2019: one company was sold, four making within activity; pursuant to item 24 of the KMG Charter, KMG resolves all Other organizations companies were liquidated. their remit as established issues related to the planning of production activities, salaries, are recommended Assets of the KMG Group will be optimized further as per by the charters logistics, social development, income distribution, recruitment, to be established the approved plans/programs. of the Companies. placement and staff retraining independently. in the form of a limited When creating new Organisations, KMG would be giving preference At the same time, the Kazakh Act on National Wealth Fund and liability partnership. to limited liability partnerships. certain Samruk-Kazyna JSC documents (Corporate Standard on Those organizations In 2019, no legal entities in the form of stock company were created. Investment for Samruk-Kazyna JSC and legal entities with fifty or that have already been more per cent of their voting shares/stake directly or indirectly held established in the form by Samruk-Kazyna JSC dated 9 July 2018; Guidelines for of a stock company, approving the appointment and early termination of the authority it is recommend of the heads of executive bodies of companies of Samruk-Kazyna to consider reorganizing JSC as approved by resolution of the Fund's Management Board on them into limited 26 December 2019. The list of organizations in the Samruk- liability partnerships Kazyna JSC whose 100 per cent of voting shares/stake is directly with account or indirectly owned by the companies of Samruk-Kazyna JSC, in for economic, legal which the heads of executive bodies of those companies are and other aspects appointed and removed by the Boards of Directors of the and in the best interests companies in agreement with the Management Board of Samruk- of the Fund's group. Kazyna JSC (approved by resolution of the Management Board of Samruk-Kazyna JSC on 12 December 2012), stipulate procedures that When creating a new restrict the KMG Board of Directors' full independence in the decision- organization the most making process (including the conclusion of M&A transactions preferrable business and the appointment of heads of KMG subsidiary executive bodies). structure would be a limited liability partnership. New organizations may only be established in the form of a stock company in exceptional cases when as Organization's shares are going to be traded on a stock exchange in the future.

260 261 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

REFERENCE PROVISIONS EXTENT COMMENTS REFERENCE PROVISIONS EXTENT COMMENTS TO THE CODE OF THE CODE OF COMPLIANCE TO THE CODE OF THE CODE OF COMPLIANCE

SUSTAINABLE DEVELOPMENT 6 Item 5 The sustainability complies Board of Directors has a specific responsibility to promote of Chapter 3 management partially the principles of sustainable development while: 4 Item 5 The Fund and its complies In December 2019, the KMG Management Board approved Guidelines of Section 2 system should have - keeping track of the implementation of the Company's Strategy of Chapter 3 Organizations should partially for the Sustainable Development Management System in the KMG clearly defined based on analysis of short-term and long-term KPI; of Section 2 have a sustainability Group and the document is expected to be approved in early 2020 roles, competencies - defining the meaning of the sustainable development principles corporate governance at a meeting of the KMG Board of Directors. This document has been and responsibilities for the Company, and makes sure they are effectively communicated system in place developed in accordance with the Code and the Reference Model assigned to each body to all parties concerned; for Sustainable Development for the Fund's portfolio companies and all employees HSE&SD Com is responsible for: and includes a description of the organization of the stakeholder for implementation - control over the implementation of sustainable development engagement process, integration of sustainable development of principles, standards in the Company; principles into key processes and monitoring, development and respective Managing Director for Sustainable Development is responsible for: of annual sustainability reporting, implementation of priority areas sustainability policies - developing and implementing a sustainable development (initiatives) in the field of sustainable development, development and plans. management system and maintenance of sustainable development culture, identification - integrating the sustainable development management system and assessment of risks, document management. into key processes, the Development Strategy and decision-making Also in 2019, KMG established a Sustainable Development Project processes of KMG. Office and issued an order on the establishment of the Sustainable Development Management Working Group. In addition, the position Managing Director for Health, Safety and Environment is responsible of Managing Director for Sustainable Development was introduced. for health, safety and environment and for: - taking part in establishing a sustainable development management system; - assisting in the integration of the sustainable development management system into key processes insofar as it pertains to his/ her business line. 5 Item 5 Sustainable complies In 2018 sustainable development was integrated the KMG Managing Director for Human Resources has social responsibility of Chapter 3 development should be partially Development Strategy until 2028. while: of Section 2 integrated into: In order to integrate sustainable development into KMG's - taking part in establishing a sustainable development management 1) management system; management system and key processes, a Sustainability Management system; 2) development System Manual was developed for the KMG Group in 2019. - assisting in the integration of the sustainable development strategy; The requirements and provisions of this document will be put into management system into key processes insofar as it pertains to his/ 3) key processes practice in 2020 after its approval by the KMG Board of Directors. her business line. including risk management, Chief Financial Officer is responsible for business direction planning (long-term and for assisting in the integration of the sustainable development (strategy), mid-term management system into key processes insofar as it pertains to his/ (5-year development her business line. plan) and short- Also in 2019, KMG established the Sustainable Development Project term (annual budget) Office and the Sustainability Management Working Group. periods), reporting, risk The roles, competencies, responsibilities of all employees management, human of the Company have not been fully set. resource management, investments, operations, etc., and decision-making at all stages from bodies (general meeting of shareholders (sole shareholder), Board of Directors, executive body) to ordinary employees.

262 263 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

REFERENCE PROVISIONS EXTENT COMMENTS REFERENCE PROVISIONS EXTENT COMMENTS TO THE CODE OF THE CODE OF COMPLIANCE TO THE CODE OF THE CODE OF COMPLIANCE

SHAREHOLDERS RIGHTS 10 Item 13 The Board of Directors, complies The Regulations on the Evaluation of the Performance of the Board of Chapter 5 its committees partially of Directors, its Committees, Chairperson, members of the Board 7 Item 2 Each Organization must complies The election of members to the Board of Directors and their of Section 2 and members of Directors and Corporate Secretary of KMG that approved of Chapter 4 have a transparent partially remunerations are regulated by the Guidelines for the compositing of the Board by a resolution of the KMG Board of Directors on 4 October 2018 of Section 2 procedure for electing Boards of Directors of Samruk-Kazyna JSC companies as approved of Directors should be provide for a structured evaluation process. This document was and setting fees by the resolution of the Fund's Management Board dated 26 evaluated every year developed in accordance with the Methodological Recommendations for its Board of Directors September 2016. as part of a structured of the Fund on the evaluation of performance of the Board (Supervisory Board Setting up a Board of Directors or a Supervisory Board and setting process approved of Directors, its Committees Chairman, members of the Board and/or Executive Body) fees to their members in legal entities where KMG holds shares/ by the Board of Directors of Directors and Corporate Secretary that were approved approved by general stake are regulated by the Rules for Setting Up Boards of Directors / of the Organization. by a resolution of the Management Board of the Fund on 26 meeting of shareholders Supervisory Boards of Legal Entities whose shares / stake are owned That process should September 2018. (the Sole Shareholder)/ by KMG approved by resolution of the KMG Management Board on 30 be consistent By resolution of the KMG Board of Directors of 23 December 2019, Member (the Sole April 2013. The Rules are to be updated in 2020. with the Fund's it was resolved was made to evaluate the performance of the KMG Member). The election In 2019, KMG developed model Regulations of the Supervisory Board methodology. Board of Directors by way of self-evaluation as well as an external to the Board of Directors for organizations with more than fifty per cent of shares in the evaluation by engaging an independent consultant. As part of that (Supervisory Board charter capital owned directly or by KMG, which was sent to its process, the work has commenced on self-evaluation of the Chairman and/or Executive Body) subsidiaries by letter on 2 July 2019 as a recommendation and of members of the Board of Directors through questionnaires should be conducted document for updating the existing regulations, if necessary. and other procedures established by KMG's internal documents. in the manner The self-evaluation process is expected to be completed in the 1st specified by Kazakh quarter of 2020, based on 2019 year-end results. laws, the Charter The independent performance evaluation of the BoD is also and internal documents planned for 2020 in accordance with the Code requirements, which of the Organization will be done after the independent organization has been selected and by this Code. in accordance with the established procedure to be providing the corresponding services.

11 Item 14 Evaluation complies By resolution of the Board of Directors of KMG of 23 December 2019, of Chapter 5 of the Board of Directors, partially a decision was made to conduct an evaluation of the performance of Section 2 its committees of the KMG Board of Directors through a self-evaluation as well and members as an external evaluation involving an independent consultant. Upon of the Board completion of the work, the results of the evaluation will be submitted of Directors, feedback to the Board of Directors of the Company in accordance to members with the requirements of the Regulations on the Evaluation BOARD OF DIRECTORS AND EXECUTIVE BODY of the Board of Directors of the Board of Directors, Committees of the Board of Directors, and the development the Chairman, members of the Board of Directors and the Corporate 8 Item 6 The Fund and its does The item on the Succession Policy for members of the Board of follow-up Secretary of KMG, which provides for the management of Chapter 5 Organizations must not comply of Directors of KMG was brought to the meeting of the Nomination improvements should of the Chairman of the Board of Directors of the entire evaluation of Section 2 have succession and Remuneration Committee of the Board of Directors of KMG all be carried out process of the Board of Directors. The development of development plans for members in November 2019. This was the first step in the development under the direction programs for members of the Board of Directors is provided of the Board of the succession plan for members of the KMG Board of Directors. of Chairman of the Board for in the Detailed Plan on Improvement of Corporate Governance of Directors in order At present, there is no formalized succession plan for members of Directors. The outcome in KMG for 2020. to maintain business of the Board of Directors. The relevant work is planned to be of the assessment continuity of operations completed in 2020 based on the results of the external evaluation should be discussed and any changes of the Board of Directors and its Committees. At present, there is no at a separate in the composition formalized succession plan for members of the Board of Directors. meeting of the Board of the Board The corresponding work is expected to be completed in 2020 based of Directors followed of Directors that may be on the results of the external evaluation of the Board of Directors by a training made in the future. and its Committees. program developed 9 Item 12 It is recommended that complies In 2019, the Board of Directors held 18 meetings, of which: for the Board of Directors of Chapter 5 meetings of the Board partially seven regular physical meetings attended by all member of the Board and for each of its of Section 2 of Directors take place 8 of Directors including one strategy session of the Board of Directors members individually. to 12 times a year. and one sustainability session of the Board of Directors; 12 Item 12 The Board of Directors complies By resolution of the Board of Directors of KMG of 23 December 2019, seven meetings held by conference call; and of Chapter 5 should review partially a decision was made to conduct an evaluation of the performance four extraordinary meetings held by conference call. of Section 2 resolutions that had of the KMG Board of Directors through a self-evaluation as well As compared to 2018, the total number of meetings has reduced been adopted earlier. as an external evaluation involving an independent consultant. from 20 to 18 which indicates a positive trend. It should analyze As part of these processes, in 2020, after 2019 year-end results, both the resolution it is planned to conduct an audit of the resolutions that were adopted and the decision-making by the Board of Directors earlier. process. Resolutions that had been adopted earlier should be reviewed if the Board of Directors assesses its own performance.

264 265 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

REFERENCE PROVISIONS EXTENT COMMENTS TO THE CODE OF THE CODE OF COMPLIANCE WHOLESALE SALES OF KMG'S OIL PRODUCTS PRODUCED IN KAZAKHSTAN, THOUSAND TONNES 13 Item 15 An induction does A draft succession plan has been developed for the Corporate of Chapter 5 and succession not comply Secretary to ensure continuity of knowledge about the activities of Section 2 planning programme of the KMG Board of Directors. The approval is scheduled must be developed to be submitted to the Board of Directors and the Nomination Product 2018 2019 within an organization and Remuneration Committee of the Board of Directors in the first for the Corporate half of 2020. Domestic Export Total Domestic Export Total Secretary. Gasoline 701 0 701 789 37 826 RISK MANAGEMENT AND INTERNAL CONTROLS Diesel 954 0 954 1,028 0 1,028 14 Item 7 The Board complies In accordance with clause 6.2.7 of Section 6 of the Policy Jet fuel 34 0 34 85 0 85 of Chapter 6 of Directors together partially on the Corporate Risk Management System of KMG and its of Section 2 with the Audit Committee subsidiaries and affiliates approved by resolution of the Board Fuel oil 192 414 606 188 469 658 are responsible of Directors of KMG dated 13 December 2016, the KMG Board Vacuum gas oil 0 200 200 0 167 167 for annual assessments of Directors ensures an annual assessment of the effectiveness of the efficiency of the risk management system and the Internal Audit Service Bitumen 53 0 53 65 0 65 of risk management of KMG assesses the effectiveness of the risk management process, and internal controls. notifies the Board of Directors of KMG of significant deficiencies Coke 44 33 77 40 51 91 in the corporate risk management system of KMG, and develops Sulfur 9 4 13 2 13 14 recommendations for improving the risk management process. In 2018, the independent consultant tested the level of KMG's Benzene 0 5 5 0 12 12 corporate governance through five components including Paraxylene 0 2 2 0 55 55 Risk Management, Internal Control and Audit. Based on that diagnostics, the Board of Directors of KMG approved a detailed plan LPG 128 0 128 114 0 114 on improvement of corporate governance in KMG for 2019-2020 Heating oil 43 23 66 7 0 7 which contains a number of measures for further improvement of the corporate risk management system and internal control Others 4 0 4 14 0 14 system of KMG including consideration by the Audit Committee Total 2,162 707 2,868 2,333 804 3,136 of the KMG BoD of an assessment of the level of confidence in the risk management and internal control system on an annual basis starting from 2020. In 2019, KMG was focused on the implementation of measures provided for in the above Plan as part of preparation for an independent diagnostics of KMG's corporate governance which is scheduled to take place in 2020. The scope of that diagnostics, among other components, will include a risk management system. For that reason, the effectiveness of the risk management and internal control system was not assessed in 2019. WHOLESALE SALES OF OIL PRODUCTS OF KMGI, THOUSAND TONNES

Product 2018 2019 Diesel 3,062 2,154 Fuel oil 2,273 399 Gasoline 1,336 1,057 Others 483 508 Jet fuel 316 395 LPG 314 152 Naphtha 121 90 Bitumen 102 120 Polypropylene 91 92 Hexane 84 87 LDPE 49 38 Environmental solvents 43 41 Heating oil 35 9 Propylene 21 28 White Spirit 7 5 Vacuum gas oil 7 0 HDPE 3 3 Plastic bottles 0 1 Total 8,345 5,181

266 267 NC KazMunayGas JSC Annual Report 2019 01 Strategic report | 02 Corporate Governance | 03 Financial statements

GLOSSARY

1P reserves - Proved reserves DBK - Development Bank of Kazakhstan IFRS - International Financial Reporting Standards NCOT - National oil transportation company 2P reserves - Proved plus Probable reserves DTP - Digital Transformation Program ICS - internal control system NED - Non-Executive Director 3P reserves - Proved plus Probable plus Possible reserves D&O - Directors and Officers IAS - Internal Audit Service NCS PSA - The North Caspian Sea Production Sharing Agreement 4ICP - Fourth Injection Compressor Project EP - Exploration & Production INED - Independent Non-Executive Director NMC - National Mining Company 5TL - 5th Trunkline ENPF - JSC Unified Accumulative Pension Fund JSC - Joint stock company NOGC - National Oil and Gas Company A&M - Agriculture & Mechanical ESG - Environmental, social and corporate governance (рус) JV - Joint venture NMSC - National Maritime Shipping Company AC- Audit Committee ECB - European Central Bank JM - Jerónimo Martins NYSE - New York Stock Exchange AG - Amangeldy Gas LLP EIA - Environmental Impact Assessment Exporting Countries KMG - Joint stock company National company KazMunaiGas NRC - Nomination and Remuneration Committee AGP - Asia Gas Pipeline EBITDA - Earnings before interest, taxes, depreciation and amor- KTO - KazTransOil NCOC - North Caspian Operating Company AIFC - Astana International Financial Centre tization KCP - Kazakhstan-China Pipeline OHSAS - Occupational Health and Safety Assessment Series APG - Associated petroleum gas EIA - Electronic Industries Alliance KMG EP - KazMunaiGas Exploration Production OECD - Organisation for Economic Co-operation and Develop- APC - The Automated Process Control ESG - Environmental Social Governance KMGI - Kazmunaigas International ment BSc - Bachelor of Science EDP - Electricidade de Portugal KPI - Key performance indicator OPEC - The Organization of the Petroleum BCMS - business continuity management system E&E - exloration and evaluation KMTF - Kazmortransflot OGPP - Orenburg Gas Processing Plant BATNEEC - Best Available Techniques not EY - Ernst & Young KZT - Kazakhstan tenge OJSC - Open joint stock company Entailing Excessive Costs FCF - Free cash flow KTG - KazTransGas plc- Public limited company BTUs - quadrillion FDI - Foreign direct investment KTGA - KazTransGas Aimak PRMS - Petroleum Resources Management System BP - British Petroleum FAR - Fatality Accident Rate(рус) kWh - Kilowatt-hour PJSC - Public joint-stock company bln - billion FGP - the Future Growth Project KPI - Key Performance Indicators PKOP - PetroKazakhstan Oil Products LLP bcf - billion cubic feet FPSA - the Final Production Sharing Agreement KTL - Complex Technology Lines PSA - Production Sharing Agreement bln m3 - billion cubic meters FC - Finance Committee KRI - key risk indicator ROACE - Return on Avarage Capital Employed BGR-TBA - Bukhara gas-bearing region - Tashkent-Bishkek- GJ - gigajoule KASE- Kazakhstan Stock Exchange JSC R&D - Research and Development Almaty Gcal - gigacalorie KGDBN - KPC Gas Debottlenecking Project SJSC - State joint stock company BSGP - Beineu-Shymkent Gas Pipeline GHG - Greenhouse gas (рус. n/a) LNG - liquefied natural gas SPE - Society of Petroleum Engineers BTUs - quadrillion GPS - Global Positioning System(рус) LDPE - low-density polyethylene SSI - Social Stability Index Code - KMG Corporate Governance Code GGFR - Global Gas Flaring Reduction Partnership LPG - Liquefied petroleum gas SACP - stand-alone credit profile CFO - Chief Financial Officer GRI - Global Reporting Initiative LLP - limited liability Partnership Samruk-Kazyna JSC, the Fund - Sovereign Wealth, Fund Sam- CDP - Carbon Disclosure Project GDP - Gross Domestic Product LTIR - Lost Time Incident Rate ruk-Kazyna Joint-Stock Company CPC - Caspian Pipeline Consortium GRI - Global Reporting Initiative’s LLB - Bachelor of laws SDG - Sustainable Development Goals CFO - Cash flow from operating activities G&A - General and administrative MMboe - million barrels of oil equivalent SEP - Stanford Executive Program CJSC - Closed joint-stock company GTU - Gas Treatment Unit mln - million S&P - Standard & Poor's CNODC - China National Oil and Gas Exploration and Develop- GHG - Greenhouse Gas MBA - Master in Business Administration MMtoe= million tonnes SACP - Stand-alone credit profile ment Company HDPE - high-density polyethylene of oil equivalent SPMC - Strategy and Portfolio Management Committee CFO - Chief Financial Officer HSE - Health, safety and environment MIT - Massachusetts Institute of Technology TCO - Tengizchevroil CNG - compressed natural gas HSE & SD Com - Health, Safety, Environment and Sustainable thous. - thousand UN - United Nations CNPC - China National Petroleum Corporation Development Committee MS - Management system UNGC - UN Global Compact CRMS - the corporate risk management system ICA - Intergas Central Asia MRM - Maintenance and repair management UGS - underground gas storage CFA - Chartered Financial Analyst IPO - Initial public offering MVP - The Minimum Viable Product USD - United States dollar Code - KMG Corporate Governance Code IMF - International Monetary Fund MT - MunaiTas UK - United Kingdom COVINA - Companhia Vidreira Nacional IT - Information Technology MNC - Offshore Oil Company WWF - World Wide Fund for Nature(рус) CDP - Carbon Disclosure Project(рус) IOGP - International Association of Oil & Gas Producers M&A - Mergers and Acquisitions WPMP - the Wellhead Pressure Management Project CNG - Compressed natural gas ISO - International Organization for Standardization mln tonnes - million tonnes WEC - World Energy Council Capex - Capital expenditures IPIECA - International Environmental Conser- NBK - the National Bank of Kazakhstan CITIC - China International Trust and Investment Corporation vation Association NC - National company

268 269 NC KazMunayGas JSC Annual Report 2019

CONTACTS

Investor relations Violations of legislation and internal regulations of KMG Telephone: +7 (7172) 78 63 43 and its subsidiaries E-mail: [email protected] Trust line: +7 (7172) 78 65 65 http://ir.kmg.kz/ E-mail: [email protected] Confidentiality is guaranteed

Public relations Infringements of the rights and legal interests of employees Telephone: +7 (7172) 78 62 77, 78 62 42 and assistance in the resolution of employment disputes E-mail: [email protected] and conflicts Telephone: +7 (7172) 78 65 60 Headquarter E-mail: [email protected] National Company KazMunayGas JSC 8, Konaev Street, Nur-Sultan, Republic of Kazakhstan, 010000 Sustainable development Telephone: + 7 (7172) 78 61 01 (reception) Tel: +7 (7172) 78 61 82 Fax: + 7 (7172) 78 60 00 +7 (7172) 78 93 38 e-mail: [email protected] е-mail: [email protected] website: www.kmg.kz Environmental issues Office Telephone: +7 (7172) 78 61 92 Telephone: +7 (7172) 78 92 15 (acceptance of documents ) E-mail: [email protected] +7 (7172) 78 62 15, 78-65-49, 78 92 76 (incoming mails) +7 (7172) 78-90-91, 90-74-27 (по outgoing correspondence) Procurement, local content Fax: +7 (7172) 78 60 00 Tel: +7 (7172) 78 64 50 e-mail: [email protected] (official) +7 (7172) 78 92 66

Human resources Hot line of the Samruk-Kazyna group of companies For vacancies: http://work.kmg.kz/ In accordance with the Information Sharing Policy, you can report any incidents or potential incidents of theft, fraud, Telephone: +7 (7172) 78 62 67 corruption and other violations of basic business principles + 7 (7172) 78 92 34 or the Samruk-Kazyna Business Code. + 7 (7172) 78 63 31 Telephone: 8 800 080 19 94 E-mail: [email protected] Sponsorship and charity Tel: +7 (7172) 57-68-98 е-mail: [email protected]

270